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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GMadScientist's picture

Interesting: add up the totals for bigger categories and you get 1/3rd foreign holds, 1/3 goober holders, and 1/3 American holders.

ZH Snob's picture

The Fed, as we all know, is a private corporation and not a part of the government.

Last time I looked they are the only ones buying the bonds, now something like 3 trill.  Wouldn't the American government owe this debt to the Fed?  Isn't it the central banks around the world (all tentacles of the BIS) that are owed this debt?  Greece is the model.  Look at how they have siezed the country, demanded liqidation of Cypress's gold, austerity from the Greeks.  All enforced by the military.

By the time they get to the USA they will have had it down pat.  Resistance is futile.

mvsjcl's picture

Who owns the debt? No one does. The debt is an illusion. When there is no choice, then there is no debt. In other words, if your very existence confers this "debt," then it must be repudiated.

nmewn's picture

Exactly right.

One of the stupidest things I hear promulgated these days is "Every child is born owing X."

The newborn didn't rack up any debt. He/she doesn't have the ability to enter into legal contracts to owe money for its mere existance.

The phrase is statist, collectivist, claptrap.


Perhaps my "statist-collectivist" junker would like to splain how (and by what legal/ethical/moral authority) the unborn individual can become a debt slave at birth.

Good luck explaining that criminal enterprise ;-)

LongBallsShortBrains's picture

Statists don't care for logic. After all, the greater good of society is the reason for everything. You must be one of those greedy INDIVIDUALS.

rosiescenario's picture

As I've been saying for sometime....we are defaulting, have been defaulting, and will continue to do so.

Seer's picture

It's like that saying, the future just ain't what it used to be...  The USD just won't be what it used to be (worth).  The printing wheels will continue to run until we can no longer convince people to take its output.  At that point it could be claimed that the US "offerred" to repay but it wasn't "accepted."  As long as there are politicians and as long as "default" is viewed as a bad thing, a bad thing that can be pinned on the politicians, a "default" will NOT happen: sure, others can claim it as such, but if it's not spoken then it didn't happen, right? (just like there was no coup in Egypt)

Al the classic signs of a drunk...

Flagit's picture

but what does that mean? whats gonna happen?

lasvegaspersona's picture

The future of a monetary system that uses gold only as a wealth asset and not as part of the calculation of the value of the currency has been suggested.

In freegold we see fiat constrained by their relationship to gold ...but gold at market value.

All currencies will hold gold the way the Euro already does. It is coming.

new game's picture

you are in essence constraining politicians and their promisses.

we need reforms top to bottom, and i would start with a revolution

that starts with taking back what is ours in the first place.  seems we need more pain b/4 gain...

AllWorkedUp's picture

"All currencies will hold gold the way the Euro already does."

I'm not sure what you mean by that statement. The Euro is just another fiat currency right?

Tijuana Donkey Show's picture

The Euro is like a split check at a restaurant, don't be the last one to leave.

scrappy's picture

FOFOA thinks the Euro is more than fiat currency.

Not to disagree with you guys, I am no expert.



lasvegaspersona's picture

AllWorked Up

In everything I have read in the past 3 1/2 years of paying attention to the monetaty  world this is the most misunderstood fact: the Euro is not just another fiat currency. It is unique in the history of money. It has 2 characteristics that distinguish it: it is not under the control of just one country and it promises nothing about gold. It holds a lot of gold on it's balance sheet but at market rates.

 The benfits of these differences are   enormous...no country can demand it hyperinflate, which is the death of all other fiat currencies. Severing it's link to gold means it will not try to control the price of gold.

These are significant points and are why the Euro will live after the dollar has died.

I can't see the future but this is how I imagine the near future taking us.

GMadScientist's picture

In Europe, the currency lives on, and the countries die instead.

Seer's picture

BUT!  Without fiat one cannot have the "growth" with which all these fuckers ride on top of.  I totally agree on the notion of binding to some actual PHYSICAL thing, though I worry about people laying waste to land in order to mine out PMs: and figure that multi-national corporations, the very same ones who basically control everything NOW will continue and just push this pedal harder.

It is inevitable that us humans run out of Natural Capital as part of our means of pushing perpetual growth.

No, this fiat thing is but the curtain masking the MUCH BIGGER issue.

Kirk2NCC1701's picture

Oh you have Growth alright, just not the kind to support that our MIC wants, nor the kind that makes the world its sweat shop or indentured laborer.

GMadScientist's picture

Don't worry; quiet as it's kept, the dirty little secret of the 'gold is money' crowd is that credit bubbles will still be available for s(t)imulating 'growth', its just that the crashes will be harder and more frequent.


Rogue Trooper's picture

Welcome to the Hotel, Deptopia

Such an empty place

Such an empty place


You can deposit your gold any time you want

But it can never leave...

mofreedom's picture

But now we owe it to the Red chinese baby killers.

Totentänzerlied's picture

"We (the State, not you running around with your .30-06 peashooter you can't even afford to shoot anymore, lol) have the guns." -Uncle Sam

Oldwood's picture

Admittedly we haven't much of a chance in a full on shooting war but the key is resistance. We can never let them think it will be easy. Thats part of what the NSA leaks and the IRS scandals and closing the parks is about. They want us to know they have us by the nuts without directly threatening us. They don't want a war, they want voluntary submission. They want us to think we haven't got a chance. The current Obamacare/budget standoff is more of the same. Do not resist their policies lest you be labeled an extremist or terrorist. Everything is about force now and resistance, even on the smallest scale, will not be tolerated. Watch this current battle. No matter what happens Obama will not let the republicans lay claim to any victory, no matter how small and pitifull. The Republican Standards will play along because they are so desperate to hold onto their positions, they will agree to anything. I think they see the end and realize barring anything really drastic, nothing will save us anyway and just want to keep what they have, just like the vast majority of everyone else.

Brindle702's picture
And how we burned in the camps later, thinking: What would things have been like if every Security operative, when he went out at night to make an arrest, had been uncertain whether he would return alive and had to say good-bye to his family? Or if, during periods of mass arrests, as for example in Leningrad, when they arrested a quarter of the entire city, people had not simply sat there in their lairs, paling with terror at every bang of the downstairs door and at every step on the staircase, but had understood they had nothing left to lose and had boldly set up in the downstairs hall an ambush of half a dozen people with axes, hammers, pokers, or whatever else was at hand?... The Organs would very quickly have suffered a shortage of officers and transport and, notwithstanding all of Stalin's thirst, the cursed machine would have ground to a halt! If...if...We didn't love freedom enough. And even more – we had no awareness of the real situation.... We purely and simply deserved everything that happened afterward. Aleksandr Solzhenitsyn
GMadScientist's picture

You gave up "resisting" when you went to bat for the red team.

nmewn's picture

lol...fiscal conservatives, by their very nature conserve their brass...its almost an obsession sometimes.

But its nice to know that Uncle Sam is stockpiling theirs, for us, as well...conquered ground must be held or destroyed and in some of these places even Daniel Tosh could get in with just a wink & a promise to be a good booie ;-)

Yen Cross's picture

Jim Grant understands the definition of insanity. "Fractional Banking".

Oldwood's picture

Our government could give a fuck about America. They just don't want a default because it would drive interest rates up and put an end to their endless spending used to buy votes and placate the mobs that may well eat their asses when the food stamps stop paying.

GMadScientist's picture

How big a mob could the Wal-Mart board really muster?

Duc888's picture

"Default means to not pay as promised"




  Not really.  Not technically.  We can cover the interest paid to the Fed by a factor of 10 just through current tax remittances.  But then we'd have to renegotiate "the loan" from the fed. 


What the Fed fears most is a balanced budget. 


What crack dealer wants his crack hoe to get clean?


See where this is goin'?


Think it through..................

ramacers's picture

actually, imminent end is more like it.

RhoneGSM's picture

 Is it just me or is there a perfect inverse relationship between the publication of irrefutable evidence of the need for gold and its' price ?

Hedgetard55's picture

Printing $85 billion a month is default by another name.

Al Gorerhythm's picture

Printing an extra $ over holdings is dilution and default. Your observation is merely a matter of incremental astonishment.

One of We's picture

some other names.....grand larceny, embezzlement, filching, poaching, purloining, rip-off, five finger discount, Corzine-ing, wicked, evil, etc.

walküre's picture

apparently even that is not enough

did they sacrifice the opportunity for war with Syria due to a lack of funding? we're fucked even more than before Syria made headlines.

lakecity55's picture

I think we sometimes overestimate the power of TPTB.

They do not have complete control of Russia, or China. Add Iran.

The proposed strike against Syria was a gamble, and the bluff was called by Russia. TPTB instructed their puppet to back down. Until now, the puppet USG has waged war without a confrontation from anyone.

This was a major setback, and they will have to reconfigure their plans, imo.

ebworthen's picture

And how many times over the past week have I heard from the President, Members of CONgress, and the MSM:

"The United States has never defaulted on its debt obligations."

Revisionist history propaganda?

Winston Churchill's picture

Of course.

He missed a default.Its four sofar.

Fifth time is a charm.Greece is only marginally ahead.

I guess they are more exceptional.

new game's picture

think it through......

debt serfs with lose of all physical means to freely produce and prosper, just as debt does to every free man and woman.

then why do honest hard working peoples sign the line to ppromise?

in the case of politicians, they certainly are not doing what we want and there are clearly legal means in the constitution

to revoke their authority.  are you pissed off enough? yet?

One of We's picture

I can't decide who I'd pick to keep in my dungeon and torture until they died of old age if I coud only pick one.....(listed in no particular order)


Lloyd Blankfein

Larry Summers

Turbotax Timmy

Chuck Schumer

John MCCain

Pol Pot

Lindsey Grahm

Diane Feinstein

Joseph Kony

Nancy Pelosi

Harry Reid

or Jeffery Dahmer


Seasmoke's picture

Pot, Kony , Dahmer ...... What they ever do to you ?

One of We's picture

Excellent point.  I'll torture them last....

nope-1004's picture

I'll take Summers.  The fat POS is such a pompous ass, ripe with indignancy toward fellow man, and hatred toward women.  The guy is a fucking asshole, pure and simple.  If I saw him on the street, I'd piss on his feet, fuckin' prick.


ebworthen's picture

Hank Fucking Paulson.

Bamboo pounded under the fingernails soaked in salt, rubbing alcohol drip off and on.

Bland nutritional paste and Las Vegas tap water to keep him alive for as long as possible.

Winston Churchill's picture

Acetone is far better for inflicting pain .than the alcohol drip.100X more painfull.

With that minor mod. +100

wisehiney's picture

BULLSHIT! Fuck them! They are already eternally tortured. Just snufff em. I have way too many jokes for you guys to do all that shit!