Style Over Substance

“May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”


Well, Maxine Waters is obviously right – impeaching the president is an urgent task of the utmost importance. As everybody knows, he is best friends with Vladimir Putin, the shirtless barbarian who rules the Evil Russian Empire (they were seen drinking kompromat together in Moscow, a vile Russian liquor that reportedly tastes a bit like urine. Senator McCain has the details on that story). And as Maxine Waters has just disclosed, Putin’s armies are recently advancing into Korea! We cannot let this stand, or he’ll invade Kekistan next (note that he already controls Limpopo and Gabon). Who knows where it will end?


We assume this was directed at President Trump.  But what Waters meant by this was sufficiently vague.  There was no guidance as to how President Trump should be getting ready.

Should he pack his bags?  Should he double knot his shoelaces?  Should he say a prayer? Naturally, the specifics don’t matter in the darnedest.  Rather, these days, it’s style over substance in just about everything.  This is why Waters – a committed moron – rises to the top of class in the lost republic of the early 21st century.

At the same time, the individual has been displaced by the almighty aggregate.  Economists pencil out the unemployment rate, with certain omissions, as if it represents something meaningful.  Then lunkheads like Waters repeat it as if it’s the gospel truth.

Somehow, through all of this, our representatives are oblivious to what’s really going on; that the U.S. government is just months away from a possible default.


The Dutch Experience

Last week, via our friends at Zero Hedge, we came across as article by Simon Black of Sovereign Man titled, The U.S. Government Now Has Less Cash Than Google.  Inside, Black details the invention of the government bond in 1517 Amsterdam and the long term ramifications for the Dutch government.  Here we turn to Black for edification:


“It caught on slowly.  But eventually government bonds became an extremely popular asset class.  Secondary markets developed where people who owned bonds could sell them to other investors.  Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.  In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.

“This practice caught on across the world.  International markets developed.  English investors bought French bonds.  French investors bought Dutch bonds.  Dutch investors bought American bonds.  (By 1803, Dutch investors owned a full 25 percent of U.S. federal debt.  By comparison, the Chinese own about 5.5 percent of U.S. debt today.)

“Throughout it all, debt levels kept rising.  The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable– wars, infrastructure, and ballooning deficits.  But people kept buying the bonds, convinced that the Dutch government will never default.

“Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.  It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68 percent of tax revenue just to service the debt.

“Well, in 1814 the impossible happened: the Dutch government defaulted.  And the effects were devastating.

“In their excellent book The First Modern Economy, financial historians Jan De Vries and Ad Van der Woude estimate that the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.

“That, of course, is just one example.  History is full of events that people thought were impossible.  And yet they happened.  Looking back, they always seem so obvious.”


Amsterdamsche Wisselbank, a.k.a. the Bank of Amsterdam. The bank’s history is deeply intertwined with the Dutch march toward default in 1814. When the bank was originally founded, it was rightly considered the soundest bank in Europe – it was 100% reserved and for a long time its notes were indeed “as good as gold” and were accepted in payment all over Europe. Holland’s downfall was closely tied to the decision to abuse the bank’s hard-won reputation by surreptitiously forcing it to adopt fractional reserve banking in order the fund the government (in particular, in order to fund its wars).

Painting by Gerrit Adriaenszoon Berckheyde


March to Default

Like the Dutch several hundred years ago, everyone believes it’s impossible for the U.S. government to default on its debt obligations.  U.S. Treasuries are considered the safest investment in the world.

Nonetheless, a series of events are coming down the turnpike in such rapid succession that Washington will be incapable of dealing with them.  Before Congress can say knife, irreparable damage will be done to the government’s financial standing.

No doubt, the great story of our time, that few seem to appreciate, is the increasing likelihood the U.S. government will default on its debt before the year is over.  Of course, this isn’t a certainty.  But by simply connecting a dot or two, one can construct a highly plausible scenario where this happens.


The federal debtberg. As Ludwig von Mises noted: “The long-term public and semi-public credit is a foreign and disturbing element in the structure of a market society. Its establishment was a futile attempt to go beyond the limits of human action and to create an orbit of security and eternity removed from the transitoriness and instability of earthly affairs. What an arrogant presumption to borrow and to lend money for ever and ever, to make contracts for eternity, to stipulate for all times to come!” – click to enlarge.


Presently, the national debt is over $19.8 trillion.  The $20.1 trillion debt ceiling will be reached in the second quarter.  After that, Treasury Secretary Steven Mnuchin will be forced to take extraordinary measures to avoid a default.

However, Mnuchin can only rob Peter to pay Paul for so long.  By summer’s end, Congress will have to increase the borrowing limit or suffer a default. Most likely Congress will wait until the 11th hour to take action.  They have in the past.  But this time, given its complete dysfunction, Congress may not get it done.

Yesterday, the Obamacare repeal and replace vote was postponed so the Republicans could circle the wagon.  Today they’ll try it again.  Regardless of the outcome, this highlights why Congress will be unable to raise the debt ceiling.  There’s just plain too much animosity to get it done.

Ultimately, the quickest way to reduce the size of government is to cut off its funding.  Here at the Economic Prism, where we believe in smaller government and greater individual autonomy, a U.S. government default sooner rather than later is more preferable.

Still, the march to default is a stoic trudge.  For the looming chaos to financial markets, the economy, and everything else will be unconditionally ruthless.


Chart by St. Louis Federal Reserve Research


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




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6 Responses to “March to Default”

  • Kafka:

    “the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.”

    Or correctly put, “the default recognized 1/3 to 1/2 of the country’s wealth never existed in the first place.” Money illusion- we’ve been practicing it for generations.

  • frozeninthenorth:

    OK so your argument that America is about to default is the debt ceiling? Really — America’s congress decided on an arbitrary number based on nothing except that there is too much debt — of course now we have a republican administration so that’s no longer an issue.

    America can continue to borrow or can decide to not repay its loans (with new loans). This is a false problem.

    As for Maxine — she’s talking to here “tribe” the same way the Freedom Caucus is talking to its tribe. Although this has to be the first time in a very long time (by my reckoning since shortly after the second world war) that the Republican in congress consider Russia a close friend that is welcomed to interfere in America’s election process.

    Man, some dead GOP members must be doing flips in their coffins!

  • zerobs:

    US residents will be forced to buy bonds. 401(k) laws will be changed, Social Security could be converted to a US gov’t bond account, etc. Obamacare replacement could be a bond-based HSA.

    All last gasp efforts, one final kick of the can.

  • Hans:

    Based on “nominal” interest rates – America is officially bankrupt.

    The default will come when buyers refuse to purchase US notes and bond treasuries.

    But wait if you order now, the FRB will monetize the debt.

  • prattner:

    There could be a political failure to avoid default, but I don’t think that’s likely. After all, more money from the Fed is just a phone call away. Why get blamed for setting off doomsday when you can print money? The solution is just too easy.

    No, I think they’ll work it out, even if they despise each other. Having a default actually means doing the right thing, facing the financial situation square on, and working through it. And the swamp critters sure aren’t there to do the right thing.

    All of those people in Washington are actually there to loot the country, enrich their friends, and push the rest of us around. If the money runs out because someone forgot to run the printing press, that means the party is over–no more corruption money, no more delightful little wars, no more anything fun. Not only that, a lot of the country would be marching on Washington, looking for answers, and you wouldn’t want to be in town for THAT.

    They’ll take the easy way out, guaranteed.

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