David Kirkpatrick

August 23, 2008

US Treasury about to begin reneging on debts?

Maybe, according to Gerald O’Driscoll, a senior fellow at the Cato Institute and a former vice president and economic adviser at the Federal Reserve Bank of Dallas, in a Wall Street Journal op-ed from yesterday.

From the intro:

Will the U.S. Treasury repudiate its obligations to its creditors, be they citizens or investors around the world? Most observers would answer “no” without hesitation. But Congress, with the complicity of the White House and the Fed, has arguably embarked on a stealth repudiation.

In his famous treatise, “The Wealth of Nations,” Adam Smith noted there had never been a “single instance” of sovereign debts having been repaid once “accumulated to a certain degree.” We may have reached Smith’s threshold.

And from the conclusion:

We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation.

If the Fed maintained its independence of action and said no to the inflationary finance of Congress’s profligacy, we wouldn’t have reached this point. But the Fed has forsaken that independence amid an absence of leadership.

Perhaps, as rarely happens, Adam Smith will be proven wrong. Let us hope so, because hope appears to be all we have.

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