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August 30, 2009
The Zimbabwe Option
Your money or your debt? Jeffrey Rogers Hummel, Why Default on U.S. Treasuries is LikelyIt is not literally impossible that the Federal Reserve could unleash the Zimbabwe option and repudiate the national debt indirectly through hyperinflation, rather than have the Treasury repudiate it directly. But my guess is that, faced with the alternatives of seeing both the dollar and the debt become worthless or defaulting on the debt while saving the dollar, the U.S. government will choose the latter. Treasury securities are second-order claims to central-bank-issued dollars. Although both may be ultimately backed by the power of taxation, that in no way prevents government from discriminating between the priority of the claims. After the American Revolution, the United States repudiated its paper money and yet successfully honored its debt (in gold). It is true that fiat money, as opposed to a gold standard, makes it harder to separate the fate of a government's money from that of its debt. But Russia in 1998 is just one recent example of a government choosing partial debt repudiation over a complete collapse of its fiat currency.
Posted by Vanderleun at August 30, 2009 12:11 AM. This is an entry on the sideblog of American Digest: Check it out.
Your Say
Thanks for posting the article. I need to read it a second time to fully understand it, of course, but I forwarded it to friends and family. I honestly don't know what actions I can take to insulate myself against what I know are going to be hard times coming soon. I'd like to think I'll live to be an old lady, and so I'd like to plan for it, but with each passing year it becomes harder to figure out the best financial path to take. And I really do feel for my nieces and nephews, all between 21 and almost 30 years. How are they going to shoulder this insane burden?
Posted by: Kerry at August 30, 2009 3:53 PM
Not buyin' it. Default would be the _honest_ way out of an absurdly unmanageable debt. If they had enough spine to outright default, they'd have had enough of a spine not to get into this mess in the first place.
They'll try to inflate their way out. The coward's way. Almost certainly.
Posted by: Umbriel at August 31, 2009 7:28 AM