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Why Default on U.S. Treasuries is Likely
Almost everyone is aware that federal government spending in the United States is scheduled to skyrocket, primarily because of Social Security, Medicare, and Medicaid. Recent "stimulus" packages have accelerated the process. Only the naively optimistic actually believe that politicians will fully resolve this looming fiscal crisis with some judicious combination of tax hikes and program cuts. Many predict that, instead, the government will inflate its way out of this future bind, using Federal Reserve monetary expansion to fill the shortfall between outlays and receipts. But I believe, in contrast, that it is far more likely that the United States will be driven to an outright default on Treasury securities, openly reneging on the interest due on its formal debt and probably repudiating part of the principal.
To understand why, we must look at U.S. fiscal history. Economists refer to the revenue that government or its central bank generates through monetary expansion as seigniorage. Outside of America's two hyperinflations (during the Revolution and under the Confederacy during the Civil War), seigniorage in this country peaked during World War II, when it covered nearly a quarter of the war's cost and amounted to about 12 percent of Gross Domestic Product (GDP). By the Great Inflation of the 1970s, seigniorage was below two percent of federal expenditures or less than half a percent of GDP. This was partly a result of globalization, in which international competition disciplines central banks. And it also was the result of sophisticated financial systems, with fractional reserve banking, in which most of the money that people actually hold is created privately, by banks and other financial institutions, rather than by government. Consider how little of your own cash balances are in the form of government-issued Federal Reserve notes and Treasury coin, rather than in the form of privately created bank deposits and money market funds. Privately created money, even when its quantity expands, provides no income to government. Consequently, seigniorage has become a trivial source of revenue, not just in the United States, but also throughout the developed world. Only in poor countries, such as Zimbabwe, with their primitive financial sectors, does inflation remain lucrative for governments. So LOL you can read the rest here.