Massive Debt + Math Wrath = Insane Financial Fail.

I've heard a fair bit of conversation, and been involved in quite a bit of it myself, about the idea of the United States defaulting on its debts. I often hear it said that the United States “has never defaulted on a debt,” or that the strongest economy in the world “could never collapse” (much like the Titanic could not sink?).

No one learns about this particular subject in Civics class, but I think we all should. The United States has indeed defaulted on it's contractual obligations to pay debts, particularly as it pertains to paying them in gold, and one specific mention of such a default is the result of the Joint Resolution To assure uniform value to the coins and currencies of the United States, enacted June 5, 1933.

http://en.wikisource.org/wiki/Gold_Repeal_Joint_Resolution

Once passed, this effectively told all creditors of the United States, most or all of whom previously had the legal right to have our debts be repaid in gold, that we repudiated the obligation to do so – that they would be paid in our national currency instead. Of course, at the time, our government (under President Franklin Roosevelt) was in the midst of the Great Depression and enacting policies that greatly devalued the US Dollar, making it an unattractive medium of exchange for investors (sound a little like what is going on today?). This resulted in lawsuits landing in the United States Supreme Court, where the law was upheld (barely), and set the stage for the complete abolition of the Gold Standard (or Gold Exchange Standard, as it might be better described after 1933) in 1971 under Richard Nixon.

Fact is, claims that the United States has never defaulted on a debt are false, and if it has happened before, it certainly can happen again. Today we see signs that the Federal Reserve is devaluing our currency (Quantitative Easing) and that, in particular, foreign investors are less interested in our currency as a major medium for trade. Of course, making your money less valuable makes sense when you owe 14 trillion dollars (not to mention the trillions of dollars in obligations that we are contractually obligated to pay over the next 50 years). Hell, our debt roughly equals our nation's Gross Domestic Product (the total market value of all goods and services produced in the country in a year). Everything I observe tells me that the United States government is not simply capable of defaulting on its debts, but that it will be forced to do so.