The Crash Course - Chris Martenson [53]
First, most of the debt was internally financed, as the ruling class, who were well represented in Parliament, held most of it. As they put the rest of the country through a serious deflationary event, the value of their own bonds surged in relative value. In essence, they voted to give themselves a rather large transfer of wealth, which was a strong motivator. Second, the English economy was just entering the Industrial Revolution, one of the most explosive periods of economic growth and wealth creation in history. Large debts can sometimes be serviced through the miracle of rapid economic growth, and that proved true in this case. Third, most of the debt was accumulated in the form of war expenditures, which were easily and rapidly curtailed once the hostilities were over. In other words, the debt wasn’t due to structural deficits, as is the case for many developed nations today that face daunting pension and entitlement expenditures in which the ongoing demands are quite different from those of a war that ends.
The second option, default, is a horrible political option for two reasons. First, defaulting on the external portion of a country’s debt is a sure way to render that country an international pariah. Nobody will trade with it, except on a cash-only basis, which is very difficult to do if your currency is collapsing (a typical consequence of a debt default). The economy of the country will suffer through the loss of needed goods, and the citizens will be deeply unhappy.
For example, imagine what would happen to the United States, which imports two-thirds of its daily petroleum needs, if it defaulted on its external debt. If even a few of its exporters decided they would no longer accept U.S. dollars in exchange for their oil, the dollar would quite rapidly lose its international value, oil priced in U.S. dollars would spike enormously, and the U.S. economy would be immediately and quite possibly permanently damaged. This means that “external default” wouldn’t generally be a viable strategy even if the political will for this option did happen to exist.
To the extent that debt can be defaulted upon internally, it’s also typically an unworkable option because the holders of that debt, as we saw in the England example above, are almost invariably wealthy and well-connected individuals with excellent opportunities to influence the decisions of government. Very rarely do people vote to impose massive losses on themselves, so internal defaults are also extremely rare.
This leaves the third option, money printing (or its electronic equivalent), as the most viable of the three options and explains why it’s almost always the preferred choice. The irony here is that it’s also the most dangerous path to take, but because its destructive effects are lodged in the future somewhere, it pushes the day of reckoning to a later time (when it could very well be somebody else’s problem anyway) and even offers a sliver of hope, however false. Hey, it just might work this time! This time might be different!
Alan Greenspan made a number of crucial errors during his tenure as chairman of the Federal Reserve, but before he held that position, he wrote this remarkably lucid and correct assessment of gold and its role in helping to shield people from the effects of governmental money printing (written in 1966, when he was managing the consulting firm Townsend-Greenspan & Co. in New York).
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose