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article imageRon Paul: Go ahead and default, we've done it three times before

By Michael Krebs     Jul 24, 2011 in Politics
As the political theater on the federal debt ceiling peaked moving into the weekend, Republican presidential candidate Ron Paul sought to downplay the Armageddon-like impact of a default.
U.S. congressional leaders and the White House scrambled over the weekend to assemble some kind of debt ceiling package ahead of the opening trades in Asian markets on Monday, Politico reported. After talks between President Obama and Speaker John Boehner (R-OH) fell apart on Friday and a hastily reconvened meeting at the White House on Saturday between the president and congressional leaders failed to deliver a tangible agreement, the prospect of a U.S. default loomed larger.
Both political parties have argued that a failure to raise the debt ceiling by the August 2 deadline, a date established in coordination with the congressional summer recess, would result in a catastrophic impact to global markets and to the American economy.
However, Republican presidential candidate Ron Paul does not believe that a U.S. default on a small portion of the national debt would have any meaningful impact on the global appetite for U.S. Treasury bonds.
Detailing his position in an opinion piece for Bloomberg, Paul argued that the United States has defaulted three other times in its history without triggering mayhem in financial and labor markets.
"The U.S. government defaulted at least three times on its obligations during the 20th century," Paul wrote. "--In 1934, the government banned ownership of gold and eliminated the right to exchange gold certificates for gold coins. It then immediately revalued gold from $20.67 per troy ounce to $35, thus devaluing the dollar holdings of all Americans by 40 percent.
-- From 1934 to 1968, the federal government continued to issue and redeem silver certificates, notes that circulated as legal tender that could be redeemed for silver coins or silver bars. In 1968, Congress unilaterally reneged on this obligation, too.
-- From 1934 to 1971, foreign governments were permitted by the U.S. government to exchange their dollars for gold through the gold window. In 1971, President Richard Nixon severed this final link between the dollar and gold by closing the gold window, thus in effect defaulting once again on a debt obligation of the U.S. government."
A U.S. default is seen by some as an inevitable outcome and one that has to be managed well.
"It's inevitable that the U.S. will default—it's essentially an empire which is overextended and in decline—and that its financial system will go with it," David Murrin, chief investment officer at Emergent Asset Management, told CNBC earlier in July.
According to a poll issued by the Pew Research Center, roughly 40 percent of Americans do not believe a U.S. default will result in economic calamity.
Ron Paul echoed this lack of concern, using history as his guide.
"No longer constrained by any sort of commodity backing, the federal government was now free to engage in almost unlimited fiscal profligacy, the only check on its spending being the market’s appetite for Treasury debt," Paul wrote. "Despite the defaults in 1934, 1968 and 1971, world markets have been only too willing to purchase Treasury debt and thereby fund the government’s deficit spending. If these major defaults didn’t result in decreased investor appetite for U.S. obligations, I see no reason why defaulting on a small amount of debt this August would cause any major changes."
Paul summed up the magnitude of the figures facing the federal government.
"The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion," Paul wrote. "The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable."
More about Ron paul, Debt ceiling, Default, National debt, Congress
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