Time for a little "selective default" in America?

When countries go bankrupt...

Sometimes, if a government is truly rotten – East Germany in 1989 or France in 1789 – it is a good thing if a fiscal crisis leads to political collapse. But for most normal countries, it is much better to get close to the edge of national bankruptcy than actually to go over the Niagara Falls of sovereign default. As Britain discovered in the 1970s and India found in 1991, looking over the edge can create the atmosphere of crisis that allows governments to win the arguments for economic reform. An actual sovereign default, however, can destroy confidence and trust among citizens and investors for years.

Perhaps the most memorable thing said so far by an official in Barack Obama’s administration was the remark by Rahm Emanuel, the White House chief of staff, that “you never want a serious crisis to go to waste”. Mr Emanuel was widely condemned for flippancy and cynicism. But an examination of world history over the last 30 years suggests he was definitely on to something. Those much discussed emerging powers, the Brics (Brazil, Russia, India and China) all needed a fiscal crisis to set them on the road to economic reform and national resurgence. America may one day be lucky enough to experience its very own national fiscal crisis. Let us hope it is not wasted.

Bankruptcy could be good for America

Jack Wheeler, in his 1/1/10 "Half Full Report," talked about a "selective default" and boy, as radical as it may seem, perhaps it actually is the only way to stop the one-way road to fiscal hell this country's been on for awhile:

What the US could do is a selective default that would pay off small bondholders - anyone who holds, say $10 million or less in treasuries. Everyone else - the Goldmans and giant banks playing the ripoff game of borrowing fed funds at almost zero interest and buying treasuries paying 3% while refusing to loan money commercially, the sovereign bondholders, most especially the Chicoms - they get squat.

Even the whisper of this will give apoplexy to guys running the big financial institutions: "No one will loan the US any money! It will be catastrophic!"

But that's what we want.

The goal of Default is to make the US government incapable of borrowing money for a decade or two, forcing it to live within its means. Default is really the only way to radically prune the federal bramble bush back to a constitutional level.

HALF-FULL REPORT 01/01/10