U.S. Leads The Way In Defaulting On Its Debt And Wrecking The Rule Of Law.

Most investors can’t imagine that the U.S. would ever default on its debt. U.S. Treasury securities are regarded as the safest and most liquid securities in the world.

The U.S. has enormous resources and huge tax revenues it can use to pay its debt at maturity. In a worst case, major banks (which are heavily regulated by the U.S. government) and the Federal Reserve can be drafted as buyers of last resort for new issues of securities if needed to pay off maturing securities. This can be done with printed money if needed.

With all of that support, why would the U.S. ever default? The answer depends on your definition of “default.”

If default means a simple non-payment at maturity, then a default is not likely. But there are many other ways to default on your bonds. For example, in 1933 the U.S. devalued the dollar from 1/20^th of an ounce of gold to 1/35^th of an ounce of gold. The Treasury securities were still paid in dollars, but the dollar had suffered a 41% devaluation measured in gold. You still got your dollars back, but there were worth 41% less.

Something similar happened in the 1970s. Measured by the consumer price index, the dollar was devalued by 50% between 1977 and 1981. Again, you still got your dollars back, but they were worth 50% less. Both the 1930s and the 1970s were examples of substantive, economic defaults even if not technical legal defaults.

This brings us to today. As described in this article, the U.S. government has frozen the assets of the Central Bank of Russia and other Russian entities, including U.S. Treasury securities and dollar-denominated bank deposits. Technically the assets still exist, still accrue interest and are still recorded in the name of the Russian owners. But, the owners can’t access or use the funds or sell the securities.

What’s the difference between that and an outright legal default? Now the U.S. is making matters worse by discussing converting those Russia assets to pay for the rebuilding of Ukraine.

This is not merely a matter of freezing assets, but of converting them to other parties and for other use against the will of the original owner. That is not even a disguised default; that’s outright theft.

Naïve policymakers in Washington seem to think these kinds of economic sanctions hurt Russia and are practically cost-free for the U.S. The opposite is true.

Russia will survive the economic war. But, the U.S. may destroy confidence in its own rule of law and in the supposed safe-haven status of U.S. Treasury securities.

Ironically, the demise of the dollar won’t come from outside forces, bitcoin, or other alternatives. The dollar’s demise will be caused by the U.S. itself through its reckless use of sanctions and inability to think two moves ahead (or even one).

Russia, China, Turkey, India, Iran, and others are already working on alternatives to the dollar-based system. Other nations will join them soon.

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