Ron Paul: "The U.S. Government Must Admit It Is Bankrupt"

Is USA bankrupt?

  • Yes

    Votes: 93 66.9%

  • No

    Votes: 46 33.1%
  • Total voters
    139
Quote from bearice:

Somebody said to me that multi-Trillion dollars bailout was donated from USA cash reserves.
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Today this person is saying USA printed money for multi-Trillion dollars bailout.
 
But at $1,329 per oz, the 8,966 tons of gold owned by the U.S. Treasury is only worth about $347.5B (Treas. carries it on books at book value of about 11B), and I think the accumulated government debt is close to 15T.
 
Quote from Ed Breen:

Misthos, that Economist article confuses issues considered in insolvency law, the law of bankruptcy with the issues that a sovereign would consider with regard to its obligations. The U.S. cannot subject itself to a bankruptcy proceeding, nor can any creditor of the U.S. demand any bankruptcy proceeding. The U.S. as sovereign will either pay its debts when due or it will not, and the result will be sovereign default but not bankruptcy (which is a legal process that take place in the federal court of the sovereign). Instead, the U.S. will consider its debt priorities not by the standards of bankruptcy priority and creditor’s rights, but by the severity of real world effects that will result in response to each potential event of default, and whether such potential default will necessarily be transparent or whether it can be made opaque. Here we really see the difference between Treasury Securities and intergovernmental accounting transfer, “faux securities.”

Because bankruptcy and insolvency priorities do not apply, the financially challenged Government will not use those non-sovereign guidelines to set its priorities. The Government understands that no real default will occur on the “faux security” ledger entries as it can simply change the terms of that debt so that there is no default, since it is all internal, one pocket to the other so to speak. These are not transactions with the public. With regard to its non-public ledger debt entries the Government can change the amount of the “faux security” balance at its discretion; it can play accounting tricks on its accounting tricks. It can simply reduce the ledger entry and say that it borrowed the money…this in turn would reduce the calculation of deficit or borrowing on the Feds unified books and it would let the government increase its public debt (by selling real Treasury Securities to the public under the ceiling; made possible by the arbitrary reduction on the intergovernmental ledger) with no effect on the accumulated deficit…it can get around a debt ceiling in this way…when it writes up the “faux securities” in the future, it will say that is has paid them back…but no real money would move one way or the other. So, you see there is no reason to consider these internal obligations as having any priority. These fake funds will be sacrificed long before any Treasury Security is even downgraded in the open market by fear of potential default.

The real issue for a functioning government is whether there is a market for its Treasury Securities, whether the public outside the Government itself will continue to buy Government Debt. If a Treasury Security auction fails, it will cause the public market to consider the question of the viability of the Government Debt; all the way through the yield curve, starting with its currency and going all the way out to the longest yield bonds. This is the stuff of “hyperinflation” (which is currency collapse and not to be confused with “inflation,” which is an insidious form of default that can progress only so long as currency remains viable). If Government continues to print money when there is no market for its Treasury Securities, it will initiate a hyperinflation, or stated differently, it will destroy its currency. Assuming the Government Political and Banking Class understand this, you can be sure that the Government will not default on its Treasury Securities in order to honor its entitlement promises.

The Government can change the terms of the entitlement promises, a kind of an insidious default passed off as fiscal accommodation policy, without destroying its currency. It cannot default on its Treasury Securities without destroying its currency. That should set out the priority for you.
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I agree with you.

Yes, barring complete incompetence, the US can never default on its debt, but I will also add: the US, barring complete incompetence will never have a bad auction either.

Treasury auctions are "rigged" games in my opinion. The seller polls the usual suspects on what they might buy, and proceeds from there. The Fed can always step up as well.

So long as the US has a free floating nonconvertible currency, it can always resort to seignorage to pay its bills.

And seignorage in an electronic balance sheet entry world is quite profitable. No gold or other metals to dig up and coin, no printing presses to grease... just a few keyboard strokes are necessary.

But I agree with you that as the Fed's role in Treasury purchases increases, the value of the currency suffers.

So that is the fiscal constraint the US faces. It can only print so much to pay for so many things. Theoretically, it can pay for everything... it can pay off it's debt as well as all current and future entitlements with just a few keystrokes. The value of that money, however, would be severely compromised.

So if there was a flashpoint, an exogenous event that creates a currency crisis, what would the Treasury do? Who does it pay first? In a way, it is not a legal issue, but a political one.

In my opinion, regardless of who the Treasury ends up paying and who it stiffs, there will be hell to pay when that moment arises.

But I don't see hyperinflation either. Not in the Zimbabwe sense. The US has the largest gold reserves. Revalued gold, and currency re-backed with gold would nip any hyperinflation in the bud. Yes, inflation would be severe with a gold revaluation - but it couldn't approach Zimbabwe or Weimar Germany levels. That only happens with pure fiat.
 
Mithos, I agree with almost everything you said above...not surprising, I guess since you said more than once that you agree with most of my analysis! There are couple of points that I would like to comment on though.

Todays, value of Gold owned by the U.S. Treasury is only about $347.5 Billion, ( 8,966 Tons = 261,498,899 Ounces * $1,329 per ounce = $347,544,614,719.38...say 345.5B) while our accumulated debt is almost 15 Trillion. That hardly provides a case to feel secure even though we own twice as much gold as any other nation...it still pales in consideration to the debt.

When we look back at historical examples of hyperinflation we tend to compress the time it took for the events to unfold...I call it 'historical time illusion. In Weimar hyperinflation the undermining of the currency began in preperation for WWI and continued during the war as Germany printed money as a way of 'paying' for the war effort...the effects of that devaluation were hidden by War Time price controls which were not lifter immediately after the war...Patriotic Germans bought War bonds to support the war and could not see the erosion of value of the Mark, so tremendous devaluaton took place between 1914 and 1919 when the war ended that was not understood becuase market prices were distorted. Thereafter Germany accelerated the practice of printing money without being able to borrow foreign or domestic funds (Becuase the domestic funds loaned during the war were wiped out). They proceeded to debase the currency as the only way they saw maintain full employment in fear of revolution that would lead to the break up of Germany...also a goal of the French. The industrial leaders encouraged the practice of devaluation in order to achieve export advantage and debt releif...they accumulated foreign currency and paid less and less tax in the debased domestic currency. The stock exchange remained high, price controls remained in place for basic necessessities and much of the revealed price increases were blamed on the war and the reparations and actions of the French and English. This continued from 1919 through 1922 on an excelerating basis and then the currency collapsed in 1923. You see the process took almost 10 years.

I am suggesting that we may now be creating a context that raises the risk that we will proceed on a path that would destroy our currency...that process will not unfold in just a few years...it will take longer, and there will have to be compound mistakes, and failures to turn back.

So, yes these are political decisions and they will be made in the very real presence of crises and potential social unrest...just as they were through the years in Germany. I think what is dramatically different is that Germany was a defeated nation and the U.S. is a victorious nation whose dollar is the reserve currency of the world...it is hard to see us going down the wrong path without taking everyone else with us.
 
Ed,

The debt does not have to be paid off completely. No sovereign debt should be paid off completely as that would be extremely deflationary. Unless, of course they are an exporting powerhouse, but even that would create other negative consequences. private sector savings = public sector debt. You can't pay off the debt the gold standard way by removing a large chunk of private sector wealth all at once or in a short time period.

So the debt only needs to become manageable once again. Debt growth needs to be at a slower pace to sort of match gdp growth rates. Austerity is not an option as it creates a deflationary collapse. "Liquidate, liquidate, liquidate!" comes to mind.

As for gold backed currency - I am not looking at today's price. I'm talking about a revaluation just prior to the re-introduction of a gold backed dollar. If the US were to go to a gold standard to stop a hyperinflation, the cost of gold would need to be much higher than it is today. I don't know, $5,000? $15,000? Such a price would be set by the government. Sort of like FDR's attempt at revaluing gold in the 1930s.

Would it be inflationary? Yes, but not hyperinflationary.

"historical time illusion" is a good phrase. I often fall victim to that. It's easy to read about a few decades of history in a few minutes and allow that time frame to warp in one's mind when looking at current events.

But today's world is very different. Look how fast everything fell apart for the USSR. The world is extremely interconnected, computers allow trillions to whizz around the world in seconds, and military operations that took years in the past today take only minutes to transpire.

And every subsequent major empire, historically speaking, faded away in a much shorter time frame than prior major empires. There's a pattern here - technology is the culprit.

Before the meltdown that I think will happen occurs, we will likely be in a very (seemingly) stable period. I wouldn't be surprised if I stop being so pessimistic, that is, that I'll buy into the "all's well again."

That's when the shit usually hits the fan.

Which reminds me of a Hemingway quote in the Sun Also Rises. When a character in the novel is asked how he went bankrupt, he responded:

“Gradually, then suddenly.””
 
Good points.

Don't look at GDP as real growth metric though, its a spending metric that is highly impacted by inflation, its surrogate mother...QE, and its bastard cousin...Government deficit spending. Confusing GDP metric with real growth is at core of demand side policy failure.
 
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