The news is all atwitter with the looming specter of an “unprecedented” default forced by an inability to come to a political compromise on the debt ceiling debate. There are hundreds of articles like this one making the following point:
With bipartisan debt-limit talks deadlocked, House Republicans and Senate Democrats readied rival emergency fallback plans Sunday in hopes of reassuring world financial markets the U.S. government will avoid an unprecedented default.
Is it true? Would a technical default be unprecedented? In fact, it wouldn’t. This fantastic article from Seeking Alpha provides a relevant history lesson:
They say it would be the end of the world as we know it. But, like all the other history they ignore, they also ignore the fact that the U.S. government has defaulted many times in the past. It defaulted in 1933, when Franklin Roosevelt refused to pay privately held gold denominated bonds, and, instead, confiscated all American owned privately held gold. It happened again, in 1968, when the Federal government refused to deliver physical silver in exchange for the silver certificates it had issued. It happened again in 1973, when Nixon defaulted on gold debts to foreign nations by unilaterally closing the door on America’s inter-governmental gold obligations.
A blog post from Kathy Lien shows what happened to the dollar when the Treasury was in technical default, this time in 1979:
Although the U.S. government has never officially defaulted on its debt, it missed payments on some Treasury Bills in 1979. Then as now, Congress was playing a game of chicken with Republicans and Democrats bumping heads on raising the debt ceiling. The debt limit was a fraction of its current levels and at the time, the dollar only fell briefly.
As we all know, past performance cannot predict future returns. We can’t know exactly how this will all play out, but there is ample reason to expect that life will not end as we know it if the “unprecedented” happens.