After seeing so many article stating that the US government has never defaulted on its debts, and then to see just as many articles stating the opposite, I’m curious to know who is telling the truth. I had assumed that the government simply rolled over its debt and has never technically defaulted on its debt obligations. Are those that claim the US has defaulted on its debts simply misinformed/crackpots? I had looked at this issue before. See http://boards.straightdope.com/sdmb/archive/index.php/t-725785.html
I look forward to your feedback.
The Atlantic
“This year, the House just doesn’t have that kind of time. Congress must lift the debt limit to avoid a first-ever default within a week of the scheduled election for speaker, according to the Treasury Department, and it must pass another spending bill by December 11 to prevent a government shutdown.”
Actually, the United States Has Defaulted Before
“The United States government has never defaulted on its obligations to pay its debt. It has never, ever missed a payment. This is one of the reasons that “flights to quality” typically involve buying US Treasury debt. Uniquely in the history of sovereign borrowers, the United States has paid when it said it would pay.”
“U.S. Never Defaulted On Its Debt? Not So Fast”
“U.S. never defaulted on its debt? Not so fast”
The Day the United States Defaulted on TreasuryBills
It’s the usual issue of people using differing definitions.
As the Forbes article says:
Is a temporary default of a few minor T-bills due to bad timing a default in the same sense as the government not being able to pay its debts? No. Is it a default in technical investing language? Yes.
So both are true, as long as you understand that they are saying different things.
A temporary default is, in the ordinary sense of the words, a default. So if the US had a temporary default on any of it obligations then, yes, it has defaulted.
It comes down to this; did the US meet all its financial obligations, in full, as they fell due? I don’t know the answer to this question but, if the answer is “no” in respect of even one obligation on one occasion, then the US has defaulted.
Of course, it may be a minor default and the markets may be willing to overlook it as of no material consequence. But, still, the US has defaulted.
I didn’t study the links, except to wonder why Louie Gohmert calls default “an impeachable offense.” Isn’t he one who votes consistently in favor of forcing default?
But there was one occasion when the U.S. definitely did default, although those who bring it up are generally ridiculed. For many years U.S. currency was redeemable in gold, at a fixed rate of about 665 milligrams of the precious metal per dollar (or at least for dollars marked “gold certificate”). In June 1933, Franklin D. Roosevelt with the approval of Congress, abrogated this promise, along with private promises for payment in gold.
Most observers consider this an essential step toward solving one of the greatest credit crises in history. (A vocal minority considers it the most horrific crime ever committed by human beings.)
Isn’t this a definition of default not used by anybody else? Currency is not a loan in any sense I understand. And gold currency was ordered to be turned in for exchange to other currency, so it wasn’t even a technical default. I don’t understand your claim for this definition.
Right, there is a question of definition. Normally, one considers a “real” default to involve either an inability or an unwillingness to pay. The 1979 “default” sounds more like a technical glitch in payment systems. There was a willingness to pay and an ability to pay, but clerical problems prevented all of the necessary checks and whatnot from being cut on time. This is where the principle of de minimis non curat lex and all that can come in. Yes it’s a default, but also, no it isn’t. This isn’t that hard to understand for people not on the autistic spectrum.
If I am trying to pay my electric bill but I slip and fall on the ice and end up in the ICU, and I pay the bill as soon as I am alert enough to ask for a letter to be added to the hospital’s outgoing mail (which happened to be three hours after the due date), did I “default”? Technically, perhaps I did, but only a moron would see that as a reflection of my creditworthiness.
Ok, but academic work suggests that the technical default led to a whopping 60 basis point increase in the funding costs of the US government for a short while and elevated funding costs for a few months afterward.
Yeah, this is a definitional thing, and here’s another thought…
Let’s say Congress doesn’t raise the debt ceiling in a timely fashion. The US has the ability to make it’s bond payments with the revenue that comes in (from taxes, royalties, etc.), so it doesn’t have to default on bonds. It might have to miss payments to vendors, which is a contractual default, but is it a debt default? Or it might miss Social Security payments. Is that a debt default? It depends how you want to define “debt” and “default.” But it would be a different scenario than the '79 scenario, so we can make a distinction between the two, even if we lump them all under a “default” category.
What exactly constitutes a “sovereign default” on securities to investors? In other words, What is the threshold (How many days?) before missed payments constitute a “default”? How much do markets care if payments are a few days late?
Any failure to meet your obligations is a default. If the payment should have issued on Monday and it doesn’t issue until Tuesday, that’s a default.
A lot, on the basis of Measure for Measure’s post. The markets were spooked and remained spooked, even after (late) payment had been made until they were satisfied that the would get interest for the period of the default and (I would guess) until the understood the factors that had led to the default and were satisfied that steps had been taken to make it unlikely that they would recur.
That’s one way to define default, but it’s not the only way to define it. For example, a lot of loan agreements have a grace period in them and will explicitly define a default as not being simply a delayed payment, but a payment which is delayed past the grace period. Some loan agreements give a cure opportunity even past the grace period.
US bonds don’t really have grace periods and the like, so if you want to define a default as any delayed payment, no matter how trivial the delay is, then it’s a valid way to look at it. I wouldn’t consider the '79 scenario a default myself, though.
Markets are going to react badly immediately to any hiccups in a government making bond payments. How badly they react and how long they react badly depends on a lot of factors, including the nature of the hiccup.
Why have there been no legal repercussions (at least none that I know of) of past defaults considering (if the below is to be believed) that the 14th Amendment and Supreme Court decisions stipulate that Congress cannot renege on its stipulated bond payments. My question is whether “defaulting” on a bond payment or servicing any other forms of debt constitute “reneging”? Would anyone interpret “default” as “reneging on a debt”?
Along with the 14th amendment, several Supreme Court decisions, including in the 1935 case Perry v. United States, have established that Congress cannot renege on its stipulated bond payments, Rivkin said.
As the majority opinion in Perry reads, “**y virtue of the power to borrow money ‘on the credit of the United States,’ the Congress is authorized to pledge that credit as an assurance of payment as stipulated–as the highest assurance the Government can give, its plighted faith.”
“To me, that suggests that the real issue in play is not, repeat, not the default on existing debt,” Rivkin said.
Ultimately, though, “[t]he real debate is whether or not new borrowing would be incurred and, if so, upon what conditions,” he added.
Rivkin called for an elimination of the debt ceiling, replacing it with a case-by-case determination.
What kind of “legal repercussions” are you imagining? The debt was paid, eventually with extra interest. There’s nobody out there still holding a 1979 bond waiting for their check to come.
Federal courts are prohibited from ruling on matters that aren’t an active case or dispute. If you say the government owes you money, and the government agrees with you and pays you in full, you have no case any more.
What exactly is the legal repercussion you’re looking for? For the '79 scenario, the US did end up paying extra interest for the late payments. That’s a legal repercussion.
We know that the US has to make good on its bonds under the Constitution. There isn’t any serious dispute about that. The gray area is whether the US has a Constitutional obligation to make good on other types of promises (like Social Security checks or vendor payments).
What exactly is the legal repercussion you’re looking for? For the '79 scenario, the US did end up paying extra interest for the late payments. That’s a legal repercussion.
We know that the US has to make good on its bonds under the Constitution. There isn’t any serious dispute about that. The gray area is whether the US has a Constitutional obligation to make good on other types of promises (like Social Security checks or vendor payments).
Thanks BrightNShiny. I understand that US’s bonded debt must be paid first, after which the government then prioritizes its payment obligations. How is the order of those payments decided ? Is it put to a vote? I’d be interested to know.
Sending out payments is done by the Executive Branch, so the President makes the prioritization decisions, but he has to do so in compliance with the law and with the US Constitution.
There’s a bunch of accounting tricks and juggling that the Treasury department can use to keep everyone getting paid for a little bit after the failure to raise the debt ceiling. But after that, it’s actually not all the clear from a legal standpoint who gets priority on payments. The President would have to make a decision on prioritization and then put out a legal memo justifying his decision. And that would probably go to court, no matter how he ended up prioritizing.
Or the President could try declaring the debt ceiling unconstitutional and continue paying everyone as planned. That would also go to court.
Or the President could try printing a $ 1 trillion platinum coin and depositing it at the Federal Reserve and use that to make payments. That would probably go to court too (although I’m not sure who would have standing to sue in that case).
To sum up, I don’t think there’s a really clear answer to this question.
This thread seems no more than an exercise to prove that they see something that the rest of the class doesn’t.
That statement is made to note that if you have a U.S. government security it will always be paid back with interest. That statement is correct. Finding some obscure occurrence that may possibly, kinda sorta make a minor case contrary to that statement isn’t helpful or pertinent.
Plus, some of these claimed defaults are pretty bizarre. Even if you use a very strict definition of “default,” I don’t really see how the 1790 debt restructuring constitutes a default by the United States government. In that, the US government assumed state and Articles of Confederation debt left over from the Revolutionary War. It might be a state default or an Articles of Confederation default, but it’s not a default by the government that was created by the adoption of the US Constitution.
Also, since most debt owners ended up far better under the restructuring then they would have without it, I think it’s even a stretch to call it a state or AoC default.
Or, take the Bretton Woods collapse. It’s fair to characterize it as a breech of our international obligations, but characterizing it as a debt default is really stretching the words “debt default” to a nonsensical place.
Perhaps Gohmert et al are making the distinction that defaulting is not, in and of itself, an impeachable offense but if a member of the executive branch denies that the debt exists at all then THAT is an impeachable offense. I have often wondered why George W. Bush wasn’t severely criticized when, after seeing a file cabinet filled with Treasury Bonds, he went around saying the Social Security trust fund isn’t real because it’s just a bunch of pieces of paper. The 14th Amendment says the validity of the public debt shall not be questioned. I can see Joe Sixpack getting away with questioning whatever he wants to, but for the President to do it… well, that might not rise to the level of an impeachable offense but at the very least I’d call it a violation of his oath of office.
Saying “yeah we owe you money but we can’t pay you right now” is very different from saying “we don’t owe you any money”.