We live in a media world that is constantly trumpeting that something is happening for the first time, that it is the biggest, the best or the worst something ever, or that something inevitably will happen if something isn’t done. Often those claims simply don’t square with the facts or with history.
The Obama administration, fighting for a second life after 2011, has joined this hallelujah chorus to frighten the electorate into accepting a bad bargain: a short-term bailout with more taxes, bigger deficits — and more government. The administration gets widespread support, from “special interests” (yours and mine) to the bond-rating agencies who failed so miserably in the 2007-08 financial crisis. Mind you, those same agencies should also be warning us that the outlook for American government securities is grim if Washington doesn’t surgically go after its runaway spending and unsustainable deficits. (Shame on old friend Stuart Varmey for not making that clear on Fox News during one of Bill OReilly’s recent tantrums.)
Just ahead of a new debt-ceiling deadline, one recalls that Treasury Secretary Timothy F. Geithner has cried “wolf” too many times before, adding to the confusion. Its certainly legitimate to speculate whether the Treasury could — as many experts insist — scrape together enough cash to pay creditors for a few more weeks while longer-term solutions were put in place.
True enough, the U.S. government has never defaulted on “the good faith and credit of the United States.” Were it to do so, the vast implications are probably unfathomable. That it would not be good for individual citizens is obvious. Still, it is quite another matter to call default the end of the world.
While it is true the U.S. has never defaulted per se, something pretty close came about not so long ago as financial history goes. By 1970, Washington had got itself into a fix that in many ways was similar to the situation today. The dollar was greatly overvalued, with bills coming due for President Johnson’s Great Society and the Vietnam War. International balance of payments tilted with inflexible fixed-currency exchange rates established by the 1944 Bretton Woods Agreement. Inflation threatened.
On Aug. 15, 1971, President Nixon unilaterally — repeat, unilaterally — suspended the theoretical convertibility of the dollar into gold, set a new lower rate, and demanded our trading partners raise the value of their own currencies. In December 1971, international officials gathered at the Smithsonian to sign on; there wasn’t a lot they could do. By the way, it didn’t work: two years later, Washington again realigned gold and the world shifted to fluctuating currencies tied to the dollar, which it has tried to maintain ever since.
Yes, of course, it was a different world. Europe and Japan had recovered from World War II but weren’t admitting it. Japan was running up huge dollar holdings, sucking away American manufacturing jobs, much as China does today. But the U.S. was seen as cock of the walk with strong — if sometimes knuckle-headed — leadership. (This was long before President Obama spent two years “leading from behind,” denigrating Americas past, its uniqueness and its leadership role.) President Nixon and his Treasury secretary, blustering Big John Connally (who had presidential aspirations of his own), slapped on wage and price controls, a calamity abandoned three years later when inflation hit double digits. In effect, “the Nixon Shocku” (as the blindsided Japanese dubbed it) had chopped its creditors off at the ankles.
Perhaps the most significant difference from those days is that now there is a crisis in every theater.
The euro, a figment of Brussels bureaucrats imagination without unified EU fiscal and monetary policy controls, is on the ropes. Sterling is in equally bad straits, with Britain trying to dig its way out of more debt than any other industrial country. The Japanese, borrowing yen from themselves with abandon for a quarter of a century, now face mammoth new reconstruction bills, to be paid by the worlds most rapidly aging population. China, hoping to be rescued by its deus ex machina of unlimited infrastructure expansion, subsidized exports and a walled-in market, is slamming on the brakes against incipient inflation of the yuan. India faces runaway inflation, with rupee investors taking their capital elsewhere because they dont see massive reform of the old Soviet-bent East India Co. economic system. Mideast sheiks are squandering their (and our) petrobillions in the same old way.
Things look disastrous in Washington, but the bottom line is: Compared to whom?
• Sol Sanders, veteran foreign correspondent and analyst, writes weekly on the convergence of international politics, business and economics. He can be reached at firstname.lastname@example.org.