Can our Government Default?
By Arnold Kling
Continuing our discussion, Felix Salmon doesn’t think so.
And yes, Uncle Sam will always be able to borrow. That’s what “risk-free rate of return” means. Is it possible to conceive of scenarios where the US defaults? Yes — but under those scenarios it’s improbable, to say the least…
Read the whole thing. And I should note that, as an investor, I behave more consistently with Felix’s views. That is, I have not pulled out of my relatively large position in long-term inflation-indexed Treasury bonds. But my thinking is somewhat bubble-esque. That is, I pretend that if a default really becomes a significant probability, then I will get out before those bonds lose value.
Where would you turn for safety? I’m not one of those people who sees gold as the safe asset. In a world where the U.S. defaults on its debt, I don’t think stocks will maintain their value. I like the federalism of Switzerland and the peace and stability of Scandinavia, but I’m not convinced that those countries have great balance sheets.
But today’s other reading is George Will’s column on the town of Vallejo, California, where
a police captain receives $306,000 a year in pay and benefits, a lieutenant receives $247,644, and the average for firefighters — 21 of them earn more than $200,000, including overtime — is $171,000. Police and firefighters can store up unused vacation and leave time over their careers and walk away, as one of the more than 20 who recently retired did, with a $370,000 check. Last year, 292 city employees made more than $100,000. And after just five years, all police and firefighters are guaranteed lifetime health benefits.
Even the City Council has at last faced facts and voted 7 to 0 for bankruptcy.
Thus, we have an example of a government that could not scale back on its promises until it declared bankruptcy.
In the U.S., the AARP plays the same role that the public-sector unions did in Vallejo.