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The US Has Already Defaulted

The Righteous Investor properly captures the debate over US default in this short piece:

Bernanke or China? Who is right about a US Federal Government default?

According to Bernanke, Congress better lift the debt ceiling or the US will default.  Yet if the only way you can make payments on your debt is by borrowing more money, you are already in default.  So far, the US government, thanks to Mr. Ben and his QE1 and QE2 and his seemingly endless loans to the US treasury, has staved off “default”.  In China, the largest foreign creditor to the United States, financial experts are saying that the US is already in default because of intentional dollar devaluation which erodes the wealth of creditors.  Apparently, China reduced its net ownership of US treasury notes over the last quarter.  Expect that it will be harder to find lenders, and Ben will be the only one left in the treasury auction room.  That’s when QE3 will start. Or riots in the streets, take your pick, Congress.  Eventually, the pressure to raise the debt ceiling will be too much for the politicians in Congress, and it will be business as usual–money creation ex nihilo, and the Bernanke put will save the stock market.

We are already in default and merely continuing the game of extend and pretend. If you disagree, wait a little while and whatever you define as default will occur. It is inevitable. Only the time horizon (and your particular definition of default) is unknown.

The only thing that I disagree with above is that the “Bernanke put” will save the stock market. It may help the stock market, but not “save” it. Remember, Zimbabwe had the best performing stock market in the world a few years back, but it did not keep up with the hyperinflation of the Zimbabwe currency. In real terms, people got devastated in that stock market as well.

1 thought on “The US Has Already Defaulted”

  1. Monty: Thanks for the mention. I agree that the stock market won’t be saved saved. It will be saved only in the sense that there will be an increase in nominal asset values. I personally am trying to stay out of the US market and am invested in Canadian resources, which works for me because I live in Canada. But we are also experiencing troubling inflation here north of the border, especially in real estate (because our Ben Bernanke, Mr. Mark Carney is keeping interest rates at even more absurdly low levels than in the US) and commodities.

    Thanks again for your very helpful blog!

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