One knowledgeable observer even says the default has already occurred. Reuters financial reporter Felix Salmon notes that some large financial firms are moving away from holding U.S. government debt. He argues this is a sign that loss of confidence in Treasury debt has begun to sink America’s economy. This catastrophe too, is more hypothetical than actual.
“The vaseline, in other words, already has sand in it,” Salmon writes. “The global faith in US institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the US and the rest of the world will be lower than it should be. Unemployment will be higher. Social unrest will be more destructive.”
Sound money advocates, including former Texas Rep. Ron Paul, have long argued that inflation itself is a form of default — and specifically that the federal government’s abandonment of the gold standard during the Depression ripped off creditors who got paid in depreciated dollars rather than in specie.
This thesis rarely gets much traction, in large part because creditors remain satisfied with payment in Federal Reserve greenbacks. Still, it is far more plausible than the recent argument that prioritizing debt service over other government spending is no different than defaulting.
The meme that “prioritization is default by another name” was created in 2011 by Deputy Secretary of the Treasury Neal Wolin. More recently the notion has caught on as a left-wing talking point, and it has been repeated by Treasury Secretary Jack Lew as well as Gene Sperling, director of Obama’s National Economic Council.
Although prioritization is a familiar process to individuals and families who routinely curb spending and tighten budgets in order to avoid missing car, credit card or mortgage payments, neither Lew nor Sperling was laughed at for making this wild claim.
“The administration has been selling this as the first default, and that just ain’t so,” Hickey, the Wayne State professor and author of “The War of 1812: A Forgotten Conflict,” told The Daily Caller.
He pointed out that the 1814 failure, which is widely described as a “technical” default, was in fact a general suspension of interest payments. But it gets little attention — both because the War of 1812, even in the middle of its bicentennial, is largely unknown, and because there is political value in ratcheting up public terror.
“It is in the interest of the party in power and its media allies to cry wolf,” Hickey said. “The more they can persuade the American people that there will be a catastrophe if they don’t get what they want, the more they can get what they want.”