Tag: Mises Institute

Yellen Is Wrong. The US Government Doesn’t Always Pay its Debts.

Mary Pat Campbell

Link: https://mises.org/wire/yellen-wrong-us-government-doesnt-always-pay-its-debts

Excerpt:

In 1934, the United States defaulted on the fourth Liberty Bond. The contracts between debtor and creditor on these bonds was clear. The bonds were to be payable in gold. This presented a big problem for the US, which was facing big debts into the 1930s after the First World War.

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So how did the US government deal with this? Chamberlain notes “Roosevelt decided to default on the whole of the domestically-held debt by refusing to redeem in gold to Americans.”

Moreover, with the Gold Reserve Act of 1934, Congress devalued the dollar from $20.67 per ounce to $35 per ounce—a reduction of 40 percent. Or, put another way, the amount of gold represented by a dollar was reduced to 59 percent of its former amount.

The US offered to pay its creditors in paper dollars, but only in new, devalued dollars.1 This constituted default on these Liberty Bonds, since, as the Supreme Court noted in Perry v. United States, Congress had “regulated the value of money so as to invalidate the obligations which the Government had theretofore issued in the exercise of the power to borrow money on the credit of the United States.”

This was clearly not a case of the US making good on its debt obligations, and to claim this is not default requires the sort of hairsplitting that only the most credulous Beltway insider could embrace.

Author(s): Ryan McMaken

Publication Date: 28 Sept 2021

Publication Site: Mises Wire

The Federal Reserve’s Ballooning—and Risky—Balance Sheet

Mary Pat Campbell

Link: https://mises.org/power-market/federal-reserves-ballooning-and-risky-balance-sheet

Excerpt:

The Fed has embarked on a massive expansionary quest in recent years. In 2020, total Reserve Bank assets rose from $4.2 trillion to $7.4 trillion amidst the pandemic and related government lockdown and fiscal “stimulus” policies. That was roughly three times the extraordinary growth in the consolidated balance sheet for the Reserve Banks in the 2008-2009 financial crisis. And in the latest weekly “H.4.1” release, total assets were up to $7.8 trillion – rising about a hundred billions dollars a month so far this year. 

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Today, short and long-term interest rates on government bonds rest near historic lows, important in part because the Fed massively expanded its purchases of government bonds. But low interest rates can’t be taken for granted, particularly if we get significantly higher inflationary expectations — which appear to have begun to sprout in recent weeks.  

If we get significantly higher interest rates for that reason, the Reserve Bank balance sheet impact from losses on securities assets would arrive if the losses become “realized” – a realistic prospect if the Federal Reserve  reverses course and starts selling off securities as a means of conducting monetary policy amidst higher inflationary expectations.

Author(s): Bill Bergman

Publication Date: 28 May 2021

Publication Site: Mises Institute