Jim Grant Warns America's Default Is Inevitable

Tyler Durden's picture

Authored by James Grant (of Grant's Interest Rate Observer), originally posted at The Washington Post,

There is precedent for a government shutdown,” Lloyd Blankfein, the chief executive officer of Goldman Sachs, remarked last week. “There’s no precedent for default.”

How wrong he is.


The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.

Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts. The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen.

Things were very different when America owed the kind of dollars that couldn’t just be whistled into existence. By 1790, the new republic was in arrears on $11,710,000 in foreign debt. These were obligations payable in gold and silver. Alexander Hamilton, the first secretary of the Treasury, duly paid them. In doing so, he cured a default.

Hamilton’s dollar was defined as a little less than 1/20 of an ounce of gold. So were those of his successors, all the way up to the administration of Franklin D. Roosevelt. But in the whirlwind of the “first hundred days” of the New Deal, the dollar came in for redefinition. The country needed a cheaper and more abundant currency, FDR said. By and by, the dollar’s value was reduced to 1/35 of an ounce of gold.

By any fair definition, this was another default. Creditors both domestic and foreign had lent dollars weighing just what the Founders had said they should weigh. They expected to be repaid in identical money.

Language to this effect — a “gold clause” — was standard in debt contracts of the time, including instruments binding the Treasury. But Congress resolved to abrogate those contracts, and in 1935 the Supreme Court upheld Congress.

The “American default,” as this piece of domestic stimulus was known in foreign parts , provoked condemnation in the City of London. “One of the most egregious defaults in history,” judged the London Financial News. “For repudiation of the gold clause is nothing less than that. The plea that recent developments have created abnormal circumstances is wholly irrelevant. It was precisely against such circumstances that the gold clause was designed to safeguard bondholders.”

The lighter Roosevelt dollar did service until 1971, when President Richard M. Nixon lightened it again. In fact, Nixon allowed it to float. No longer was the value of the greenback defined in law as a particular weight of gold or silver. It became what it looked like: a piece of paper.

Yet the U.S. government continued to find trusting creditors. Since the Nixon default, the public’s holdings of the federal debt have climbed from $303 billion to $11.9 trillion.

If today’s political impasse leads to another default, it will be a kind of technicality. Sooner or later, the Obama Treasury will resume writing checks. The question is what those checks will buy.

“Less and less,” is the Federal Reserve’s announced goal. Under Chairman Ben Bernanke (with the full support of the presumptive chairman-to-be, Janet Yellen), the central bank has redefined price “stability” to mean a rate of inflation of 2 percent per annum. Any smaller rate of depreciation is an unsatisfactory showing to be met with a faster gait of money-printing, policymakers say.

In other words, the value of money has become an instrument of public policy, not an honest weight or measure. In such a setting, an old-time “default” is impossible. How can a creditor cry foul when the government to which he is lending has repeatedly said that the value of the money he lent will shrink?

The post-1971 dollar derives its value from the stamp of the government that issues it. Across the seas, this imprimatur is starting to look a little tenuous. Lend us your dollars for 10 years, the Treasury proposes. We will pay you the lordly interest rate of 2.7 percent per annum. And at the end of those 10 years, we will hand you back your principal, which will almost certainly buy less than the money you lent.

This is the unsustainable conceit of the world’s superpower-cum-super debtor. By deed, if not audible word, we Americans say: “The greenback is the world’s great monetary brand. You have no choice but to use it. Like it or lump it.” But the historical record of paper currencies is clear: Governments always over-issue it. The people finally do lump it.

What to do? Let us face facts: We have defaulted in the past. Let us confront the implied message of the Federal Reserve’s pro-inflation policy: We will default in the future, though no lawyer will call it “default.” And let us preempt the world’s flight from our intangible money by taking steps to fashion a 21st-century improvement. We have the gold and the brains to find the solution.

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BlueDonkey's picture

we have the gold???


SafelyGraze's picture

left out the silver certificate default

tallen's picture

Oh just what the world needs, another person proclaiming the end of the US.

Fractional reserve banking means the debt cannot ever be paid off without extinguishing the money supply. People proclaimed the end of the US dollar back in the 90s, yet it's still here. They will not let the US default, these people are all in office for the money and don't want to be responsible for the US defaulting so they lose their cushy job.

disabledvet's picture

exactly. you have to define VALUE first (i.e. "the existence of your City without any credit") before you start going "full frontal" vis a vis gold. not that full frontal is bad mind you..but if there is one thing Alexander Hamilton...who was a soldier btw...understood is that we HAVE a lot of things even if we don't (or didn't) make a lot of things (back then.) That's simply not the case now. I will not even bother trying to get into an historical appreciation of "what is an an industrial revolution and why it matters" with someone who clearly stares in wonder (which he should) at the Chrysler Building but has no clue what a Chrysler actually is (no, it has no gold in it i'm afraid) suffice to ask "if gold is so valuable and the dollar so worthless, why is savings even valued less?" don't even get me started on what it cost Apple or Verizon to borrow...was it 60 billion? I mean give the world a break...okay?

Pinto Currency's picture


FDR's greatest default was that he took away the American peopes gold outright and gave them paper chits before he devalued the currency to foreigners.

Say What Again's picture

everyone on this site has been predicting the end of the financial markets as we know them for for about 5 years now.  How will we know when the end is REALLY near?

Pinto Currency's picture


We'll all say things are looking up and we misunderstood barry.

Ham-bone's picture

Maybe share this w/ folks who care (if you can find one)...I think people have no context to even begin caring right now...so here goes pissing in the wind...cause good governance starts with an informed populace.


American Economic Cheat Sheet:

-US GDP (sum of all US economic activity upon which taxes are raised) is $16 T (Trillion...btw this =$16,000 billion...$1 billion is a $1,000 millions) and growing @ 2%'ish

-US Federal Gov Treasury debt is $17 T and growing @ 8%'ish

-2012 US Federal tax income $2.3 T  vs. Federal expenditures $3.6 T or $1.3 T deficit...2013 should be a smaller deficit, likely $800 Billion

If this debt continues growing dramatically faster than economic growth (and the tax base to pay for it)...the government (via the Feds QE...Quantitative Easing or the Fed's policy since '09 of buying $3.5 T in Treasurys and mortgage debt w/ newly created money) will continue printing money (diluting existing holders of money) to ensure non-market pricing of Treasury's and mortgages is maintained (Fed is the only party willing to buy this debt @ these very low rates w/ high risks...if the Fed did not do this, the Congress and President would be forced to make hard decisions to ultimately prioritize spending and taxation and the economy would be restructured accordingly.  Please note this would be economically painful in the short term but beneficial mid / long term).

Note that the Federal government does not pay off our Treasury debt but rather only rolls over (re-sells) our existing debt along with our newly issued debt.  Thus, the amount of debt is increasing exponentially while the economy is growing in a linear function (ie, since '07 public Treasury debt has increased by 125% while the economy has incease @ 10%'ish).

Quick breakdown of Federal Treasury debt: 

-$5 T is intragov Treasury debt owned by Social Security and other government functions...this was created when the gov was running surpluses of income and the excess was used to buy Treasurys...the government holders roll this over so no worries so long as SS receipts are greater than benefits...discussion for another day.

- $12 T Public Outstanding Debt (active Treasury's in market place)

- Quick Defiinition of Treasury debt...Treasury Bills or T-Bills less than one yr. duration - Notes intermediate duration - Bonds / TIPS 10yr plus duration

- $7.8 T in T-Bills (Fed owns basically zero) 

- $4.2 T in Notes / Bonds (TIPS) (Fed owns $2.2 T or 50%'ish of all medium / long term debt) 

-QE is Fed buying $45 billion monthly ($540 Billion annually) of Treasury debt (notes/ bonds) and that amounts to about 150% of Treasury's issuance meaning Fed buys essentially all new plus most if not all rollover debt (Fed QE also buys $40 billion of mortgage debt monthly to drive down mortgage rates)...The $85 billion in monthly QE is not from taxes but simply money the Fed creates with which to buy these (think monopoly and when you run out of money but still want to buy something, you just grab a sticky pad and put a number on it and pass it off as legal tender...voila, QE!!!).

- At this rate Fed will own 70% (it's own rule for the max amount of every issuance it can own) of all Notes / Bonds (TIPS) within about a year (at current QE and current Treasury issuance)...this means Fed is buying virtually all outstanding intermediate / long term US debt. 
- This also means all $5 T of foreign held Treasury debt (China / Japan, etc.) has essentially moved from a mixture of short/med/long debt to only the shortest duration T-bill market 
The takeaway is that the Fed has ensured there will never be an intermediate or longer dated interest rate spike (no bond vigilantes or market based sell-offs based on US policy)...but it also means Congress and the President have no pressure or penalty for not coming to compromise or prioritizations of spending and taxation.  This means that the US is incredibly vulnerable to a short term T-bill exodus that the Fed would be incapable of covering without increasing QE (bond buying) radically...This is the danger to the currency that the Fed will increase it's balance sheet to own in essence 70% of all marketable debt.

The implications for the dollars purchasing power is very precarious as this is threatening to skyrocket the money supply and thus a sudden and dramatic loss of standard of living for Americans.

Of course it's much more complicated due to unfunded liabilities (promises to pay SS or medicare in the future w/ money already spent) derivatives (like insurance but called something else to avoid the regulations around actually setting aside capitol in case something actually happens) and leverage (borrowing capital (money) to increase the potential return but risking greater potential loss) of everything financial.  These are topics for extra credit for those who actually may have read this far and still interested (nerds :) ). 

Thanks for reading and hopefully with greater information, discussions can start from some shared facts and reach deeper than which political party will win next.

Supernova Born's picture

Jim Grant should found a new political party, run for president...basically...accept his destiny.

His wisdom must find a broader audience. The most impressive argument of all is the one that distills otherwise complex concepts into simpler truths readily absorbed by the honorable core of this Nation.

Regrettably, the "core" is unstable and at risk. If the likes of Mr. Grant don't attempt to speak to them directly I think meltdown is next.

MeMadMax's picture

Normalcy factor...


Shit ain't gonna happen till it happens for real, as in the power goes out or food stops showing up at the grocery store...


Otherwise, rider er' in all the way babe... ooooh yea baby, squeeze it good...


Max Hunter's picture

Tyler.. top Brass in charges of Nukes gets fired.. top 2 in the last 48 hours. It matters. Lets talk about it. .. Okay.. that was from a couple weeks ago..sorry.. but still? wow.. interesting stuff..

BoNeSxxx's picture

Grant, Faber, King, and Schiff in a row?  Looks like it's going to be a wrist-slitting kinda day!

EnslavethechildrenforBen's picture

Con job.

Why are you all discussing these as if they are anything other than CRIMINAL?

MarcusLCrassus's picture

Our politicians have basically taken the stance "After me, the deluge"

Boris Alatovkrap's picture

Wrong, there is precedent for default, name is Obama, President Obama.

(Boris is play with homonym)

brettd's picture


We'll just become Italy and Spain.

Huge goverment sector.  No invention or industry.

More fights over soccer than policy....

NeedtoSecede's picture

The Italians still know how to make some mighty fine shotguns and the CX4 Storm is perfect little carbine for home defense.

We are screwed...

y3maxx's picture

""Jim Grant should found a new political party, run for president...basically...accept his destiny.""

As does Ex Governor Jessie who steps up and has the guts to denounce the American Political Party system...

https://www.youtube. com/watch?v=LhSJgJZspnU

geox's picture

Hard to believe someone gave a negative point to such explicit and sucinct post. I guess not everybody wants to be educated in a simple way ;-)

brettd's picture

So, the fed will soon own much of America by giving the Govt credit.

Then the Fed, a conglomeration of Private Banks....

Will begin calling the loan---and they will ask for a national 

park or two in exchange for "debt forgiveness"; old postal 

buildings and museums in Detroit and utilties rights........

if I were a Fed, that's what I'd do!

Louie the Dog's picture

 I read it all.  Thanks Ham-bone. 

Kayman's picture


thanks for the succinct summary. Bottom line is one day short term debt is going to blow up. But let's party til it happens. Work ethic replaced by the scam ethic.

emersonreturn's picture

thank you ham-bone.  beautifully articulated.

MeMadMax's picture

Rome wasn't built in a day, and it didn't die in a day...

Patience Obi'Won...

Winston Churchill's picture

It will not be long in relative terms.Romes was limited to the speed of the horse.20 mph.

With coms speeds at 186000 miles per second, Pax Americana will not take 400 years to die.

Kayman's picture

And the Romans hadn't discovered the magic of paper currency nor electronic digits or the Roman Empire would have lasted as long as Anthony Weiner's political career. 

bunnyswanson's picture

Value will diminish.  Even Costco is carrying less than the freshest and besst produce (as opposed to raising prices even higher) or they just stop carrying the item.  This is a scam.  A ponzi scheme. 

It has happened before.  The same formula has been used at least 3 times on a large scale, and 300 million times on a small scale.  PREDATORY LENDING

Secret is money going the wrong way.

CAFR - off budget accounts.  Rainy day committees, Hallelujah the elephant in the living room.


Karen Hudes interview with RT TV.



Ex high official capacity individual sharing his observations


The American truckers


(It is unthinkable a leader/govt body has allowed their country to reach such a pitiful state, all while gaining great wealth and seemingly in the stock market thanks to their assigned privileges to insider trading information.  Disgraceful.  A mob-like mentality where corruption should be accepted as just part of it.  They live in abundance and lives of general comfort and ease, and always will thanks to their constituents.  They should hang their heads IN SHAME for allowing their citizens to become so vulnerable, that is betrayal of trust.

Proofreder's picture

NEVER blame intelligent conspiracy for just plain stupidity, greed, and hubris.  A government does not 'allow'; rather the political institutions become hidebound, aged, and blindly out of touch with the electorate to the extent that an alleged leader (President, Prime Minister) becomes a replaceable puppet within a revolving door - the political institution made up of unelected 'managers' and bureaucrats which view all administrations as temporary help.

We are so fuked in the future, no matter who sits in the Oval Office next.

Is it possible that the Federal Reserve System could declare bankruptcy, overturn their bench in the marketplace, and just disappear into endless litigation while the U.S. Government reestablishes constitutional money ???   Real Hope, real change in that.

in4mayshun's picture

You assume that these traitors are abiding by the same set of social/moral/philosophical standards that most Americans use to measure their lives.

And they are not. They see the big picture, and in that picture we don't matter. I wish they were wrong, but sadly, America keeps proving them right.

RSloane's picture

Depends on your point of view. Our current financial markets can wallow in risk-on behavior with zero consequences. No matter what they do, they will be backstopped by the Fed, and ultimately the tax payers. Do you refer to this as the financial markets functioning appropriately?

What we are watching is a 'death by a 1000 papercuts'. There are unlimited bandaids left in the Fed's arsenal made at will without concern for long term consequences. This could go on and on until the US reaches full status as a banana republic.

Winston Churchill's picture

Which part of a banana republic has not been reached ?

I can't see a missing component.Having lived in a couple, I cannot see a diference.

All in 15 years or so, though longer in the formenting.


Just waiting on Emperor for life, Obozo 1st.

StychoKiller's picture

Look to the BRICS to announce a new, gold-backed currency, then watch the Saudis stab the US in the back.

Ignorance is bliss's picture

You realize that the chrysler building was built in 1928...when we had a gold standard. Was that your point? It does not contain gold but gold was used to build it. 

Clowns on Acid's picture

Vet - Alexander Hamilton was a "soldier". but not a fighting one. Probably never fired a shot. Hamilton was George Washington's butler.

Please Read " Burr,Hamilton, and Jefferson - A Question of Character" to get the actual picture of who Hamilton was.

TrulyBelieving's picture

So what you need then is someone who will tell you everything will be great. OK, All is fine, the system is working, people are going back to work, Health costs are under control, and your retirement days will be bliss. What else would your ears like to be tickled with?

DaveyJones's picture

tickle the ivories has taken on a whole new meaning

Wahooo's picture

Re pubs just caved. Obamacare lives. Spending forever. BTFD.

cocoablini's picture

This is dumb. The US can't default because the debt is payable in dollars. This is the stupidest crap ever. If I owed people a turd, and I make turds I can pay them back. Defaulting on a gold standard is way different as the debt is payable in metal. The dollar is just some jacked piece of shit contrivance. A mere plaything for eggheads with math equations...ie: Janet Yellen. A Keynesian masturbating in front of the printer

Incubus's picture

how do I get that job... masturbating infront of a printer?


sounds nice.  I don't think I have enough manjuice for fulltime, though. I'm going to need a high zinc diet.

LongBallsShortBrains's picture

One of the employees at the fed, in charge of the twenty dollar bill printers, lost his job.
He came home and told his wife " I've had a terrible day, I got fired" his wife looked at him in disbelief, for Tom had held this job for nine years.

"what happened ?" she said

"I don't know" he replied, " I was just sitting there doing my job, making sure the twenty dollar bills moved out of the printer and properly to the bill slicer, when I got the strangest feeling. I wanted to put my ding a ling in the bill slicer, and I couldn't control myself. I don't know what came over me"

His wife quickly pulled down his pants to investigate. There was nothing wrong with his privates. Bewildered, she asked him "what happened to the bill slicer? "
He replied, "The god damned boss fired her too!!"

the tower's picture

Did you look this up on Wikipedia? It's not about paying off the principal, it's about paying interest.

Other than that, it's about the debt to GDP ratio, which is WAY out of control.

The people in office have no control over a default.

Winston Churchill's picture

Its not even the debt/gdp ratio anymore.

Remove from gdp Fed State. and local spending + $1 Tn pa  in QE.

Real gdp is around $8tn pa.Thats a a lie with 30 yrs of compounding of understating the deflator.

Accruing annual debt is $5.9tn.Which is prolly the true gdp.

This is now a balance of payments crisis.A more  subtle but important inflection point.

The country is bankrupt by all definitions of that word.

Just waiting the knackers van ride to the glue factory..