The Blog

What Our Forefathers Knew Before Us.

Posted on May 11, 2016

What Our Forefathers Knew Before Us.

Posted on May 11, 2016

Just the other day Trump told CNBC that he understood the U.S. Debt was far too large and problems would arise amidst raising interest rates. 

Peter Schiff on CNBC said, "Trump just admitted on CNBC that America has too much debt to afford a rate hike, and that he wants our creditors to accept less than 100 cents on their Treasuries," the Euro Pacific Capital CEO explained on CNBC's "Futures Now" last week. "In other words, Trump knows a U.S. government default is inevitable."1

Granted, the article from CNBC was a bit sensational but what’s encouraging is that Trump at least understands that our National debt is cumbersome and any tightening of interest rates would not be helpful.  Trump, is not the only one who understands this.  Plenty of economically minded folks around the globe understand this.  [Mind you, raising rates is the proper and responsible thing to do which could lead to a temporary recession as history proves].

The other day when I was writing about the implications of the recent problem of sovereigns defaulting on their debts, [Greece & Cyprus] 2 with Puerto Rico being the most recent, it made me remember an important message from Charles De Gaulle.  Upon some research it turns out that he made a speech in 1965 about the problem with the Bretton Woods System. 
Watch it here. 3Below are his words typed. Mind you, this was February 1965 before bailouts existed.

“The fact that many countries, accept as principle dollars being as good as gold for the payment of the differences existing to their advantage in American balance of trade, this very fact leads Americans, to get into debt, and to get into debt for free at the expense of other countries.  Because, what the U.S. owes them, it is paid, at least in part, with dollars they are the only allowed to emit. Considering, the serious consequences a crisis would have, in such a domain, we think that measures must be taken on time to avoid it. We consider necessary, that international trade, be established, as it was the case, before the great misfortunes of the World, on an indisputable monetary base, and one that does not bear the mark of any particular country. Which base?  In truth, no one see, how one could really have… any standard criterion other than gold!”3


Essentially, De Gaulle understood that a world backed by fiat currency from a single country would not last and could come under pressure amidst a crisis.  He was a strong proponent of decentralization of Europe and did not believe in relying upon other countries for protection or prosperity.4 

The correlation between De Gaulle’s words and that of Trump’s or anyone who believes in US default occurring should take away this fact: When governments get debts too large for too long, someone is going to call them on their perceived ability to repay that debt.  History has shown us this time and again.  Unfortunately it’s happening at an accelerated pace in the last five years with differing countries coming under pressure. 

If you’d like to know what would occur if the US defaulted you could look back at history for your answer.  It’d be world leaders convening as they did in Bretton Woods, NH circa 1944 to come up with new terms for a new monetary system. Except this time, the IMF and World Bank would be involved for sure.

-End-

Jos. G. Sellery

Sources:
1http://www.cnbc.com/2016/05/08/trump-just-exposed-americas-dirty-little-secret-schiff.html
2https://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financial_crisis

Note: There were plenty of legitimate news sources such as the economist or Forbes or Bloomberg that I could have chosen to be the source of this information but, when you click on those links it stops you from getting to the article since you have to sign-in.  The economist had a great article which you can refer to without any sign-in.  It simply takes some scrolling to get to the part about the unravelling of 2012-2013.  Read it here. http://www.economist.com/blogs/freeexchange/2013/03/interview-athanasios-orphanides

 
3 https://www.youtube.com/watch?v=i-g2iGskFPE&autoplay=1&app=desktop
4 https://en.m.wikipedia.org/wiki/Charles_de_Gaulle

“In the context of the Cold War, de Gaulle initiated his "Politics of Grandeur", asserting that France as a major power should not rely on other countries, such as the US, for its national security and prosperity. To this end, de Gaulle pursued a policy of "national independence" which led him to withdraw from NATO's military integrated command and to launch an independent nuclear development program that made France the fourth nuclear power. He restored cordial Franco-German relations to create a European counterweight between the Anglo-American and Soviet spheres of influence. However, he opposed any development of a supranational Europe, favoring a Europe of sovereign nations and twice vetoed Britain's entry into the European Community.” Fourth paragraph from the top.

“De Gaulle oversaw tough economic measures to revitalize the country, including the issuing of a new franc (worth 100 old francs).[90] Internationally, he rebuffed both the United States and the Soviet Union, pushing for an independent France with its own nuclear weapons, and strongly encouraged a "Free Europe", believing that a confederation of all European nations would restore the past glories of the great European empires.[91]

5http://content.time.com/time/magazine/article/0,9171,840572,00.html  This last source was not used but I thought it kind of cool that I found the article from Time magazine circa 1965.  Money: De Gaulle v. the Dollar Friday, Feb. 12, 1965

5“Perhaps never before had a chief of state launched such an open assault on the monetary power of a friendly nation. Nor had anyone of such stature made so sweeping a criticism of the international monetary system since its founding in 1944. There was Charles de Gaulle last week proclaiming that the primacy of the dollar in international dealings was finished, calling for an eventual return to the gold standard —which the world's nations scrapped 50 years ago — and practically inviting other countries to follow France's lead and cash in their..” Time Magazine Money: De Gaulle v. the Dollar Friday, Feb. 12, 1965