Bad debt

Washington Is Quietly Repudiating Its Debts (August 22 – WSJ)

Will the U.S. Treasury repudiate its obligations to its creditors, be they citizens or investors around the world? Most observers would answer "no" without hesitation. But Congress, with the complicity of the White House and the Fed, has arguably embarked on a stealth repudiation.

In his famous treatise, "The Wealth of Nations," Adam Smith noted there had never been a "single instance" of sovereign debts having been repaid once "accumulated to a certain degree." We may have reached Smith's threshold.

We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation. If the Fed maintained its independence of action and said no to the inflationary finance of Congress's profligacy, we wouldn't have reached this point. But the Fed has forsaken that independence amid an absence of leadership.

I posted this because it is striking to see printed in the Wall Street Journal. The author is from the Cato Institute, a libertarian think tank, so the sentiments are not surprising; only that they were printed so prominently.

I happen to agree with the assessment that the most likely outcome for this whole mess will be an outright repudiation of U.S. debt obligations. I remain agnostic as to whether this will happen through a process of inflation, as the author suggests (and as is certainly underway), or deflation – although I am hedged 70-30 in favor of inflation. So I guess I am a tilted agnostic.

At any rate, such sentiments being openly printed is not good for Sino-US relationships at this delicate moment when the U.S. is on the verge of nationalizing Fannie and Freddie.

This is a companion discussion topic for the original entry at