Arnold Kling  

Can our Government Default?

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Continuing our discussion, Felix Salmon doesn't think so.


And yes, Uncle Sam will always be able to borrow. That's what "risk-free rate of return" means. Is it possible to conceive of scenarios where the US defaults? Yes -- but under those scenarios it's improbable, to say the least...

Read the whole thing. And I should note that, as an investor, I behave more consistently with Felix's views. That is, I have not pulled out of my relatively large position in long-term inflation-indexed Treasury bonds. But my thinking is somewhat bubble-esque. That is, I pretend that if a default really becomes a significant probability, then I will get out before those bonds lose value.

Where would you turn for safety? I'm not one of those people who sees gold as the safe asset. In a world where the U.S. defaults on its debt, I don't think stocks will maintain their value. I like the federalism of Switzerland and the peace and stability of Scandinavia, but I'm not convinced that those countries have great balance sheets.

But today's other reading is George Will's column on the town of Vallejo, California, where


a police captain receives $306,000 a year in pay and benefits, a lieutenant receives $247,644, and the average for firefighters -- 21 of them earn more than $200,000, including overtime -- is $171,000. Police and firefighters can store up unused vacation and leave time over their careers and walk away, as one of the more than 20 who recently retired did, with a $370,000 check. Last year, 292 city employees made more than $100,000. And after just five years, all police and firefighters are guaranteed lifetime health benefits.

Even the City Council has at last faced facts and voted 7 to 0 for bankruptcy.

Thus, we have an example of a government that could not scale back on its promises until it declared bankruptcy.

In the U.S., the AARP plays the same role that the public-sector unions did in Vallejo.


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CATEGORIES: Social Security



COMMENTS (6 to date)
Matt writes:

Congress can get into a situation in which the next increment in borrowing yields a much greater increment in inflation expectations and bond premiums.

Just like Vallejo, major economic sectors become leveraged on government budgets, so one gets much higher volatility in each sector. Remember, we nationalize the fannies because they are highly volatile to the bubble burst. So is medicine, defense, transportation, energy, education; all highly leveraged now on congressional actions.

Snark writes:

Crime Rates for Vallejo, CA would appear to indicate that these higher efficiency wages have not significantly improved labor productivity, or am I comparing bagels to doughnuts?

Marcus writes:

Vallejo, CA does not print their own money.

TheFinanceDude writes:

Dont know how many people HAVEN'T already read this little number but the US bankruptcy issue has been discussed at the FED RESERVE level over two years ago and the conclusion was yes it can and may happen...

http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf

TheFinanceDude writes:

Come to think of it, since FDR abondoned the gold standard, wasn't that BK for all technical arguments?

Lord writes:

Not quite. The former is official malfeasance, the latter the democratic process. If the voters in Vallejo voted on those pay packages it would be a different story (and likely not a crisis at all).

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