Who says the U.S. has never defaulted?

Despite all the grandstanding and dirty politics in Washington, any day now the United States debt ceiling of $14.294 trillion will be raised.

I have no doubt about it. And quite frankly, it doesn’t really matter what agreements they come to in order to raise the debt ceiling. In the grand scheme of things, whatever they do will be nothing more than kicking the can down the road.

Because the United States government is in worse shape than being flat broke. It’s completely insolvent. The debts and IOUs the government has racked up are patently unpayable.

Don’t get me wrong. There is going to be pain ahead for everyone. Social Security benefits are going to be cut … Medicare, too. A lot of us are going to suffer. I am not unsympathetic.

The simple truth of the matter is that I have never relied on the government for anything, and I am not about to do so now. Neither should you.

You need to take your fate into your own hands and fend for yourself. Period.

The way to do that is with the types of investments I recommend in my Real Wealth Report — in tangible assets and natural resources such as gold and more. And by investing in economies that are solvent, not insolvent — such as Asia.

But there’s also another way to protect your money and grow your wealth. I’m not talking about investments. I’m talking about recognizing the truth. The historical truth.

Anyone who tells you that the United States government has never defaulted on its debt is simply either completely ignorant or, worse, being outright irresponsible.

The fact of the matter is that …

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The United Sates Has Effectively

Defaulted At Least Six Times

Default #1: The Continental Currency Default of 1779

Largely to fund the Revolutionary War, the Continental Congress of 1775 issued notes totaling 241 million Spanish milled dollars over roughly a two-year period.

They were the first of the so-called “Continental dollars.” But since Congress had no power of taxation, it made each of the then-13 states responsible for paying them off, prorated based on their population.

But the states couldn’t pay them off. So in November 1779, Congress agreed to redeem the notes — with currency worth less than 1/38th the Continental’s original value.

Default #2: The Default of 1790

In addition to its currency issuance, the Continental Congress borrowed money both domestically and abroad. The domestic debt totaled approximately $11 million Spanish dollars. The interest on this debt was paid primarily by money received from France and Holland as part of separate borrowings.

When foreign lending dried up, Congress defaulted on its domestic debt starting on March 1, 1782 — by refusing to pay and, instead, accepting the notes for payments of taxes.

By 1790, Congress repudiated these loans entirely.

Default #3: The Greenback Default of 1862

In August 1861, to fund the Civil War, Congress created a new currency which became known as the “greenback” due to the green color of its ink.

The original greenbacks were $60 million in demand notes in denominations of $5, $10, and $20 — redeemable at any time at a rate of 0.048375 troy ounces of gold per dollar.

But in January 1862, only five months later, the U.S. Treasury defaulted by refusing to redeem them on demand.

Later, the Treasury issued “greenbacks as non-redeemable legal-tender.” They traded hands at discounts from the original greenbacks of as much as 40%.

In effect, the currency was devalued by as much as 60% to finance the Civil War.

Default #4: The Liberty Bond Default and Gold Devaluation of 1934

The financing of the United States government stepped up to an entirely new level as a result of the cost of World War I. So starting in 1917, Congress issued “Liberty Bonds.”

The last bond issue, October 24, 1918, was a $7 billion, 20-year, 4.25% percent issue, payable in gold at a rate of $20.67 per troy ounce.

By the time Franklin Roosevelt entered office in 1933, the interest payments alone were draining the Treasury of gold. In addition, the country’s total debt had climbed another $18 billion to $22 billion. Yet, the Treasury had only $4.2 billion worth of gold.

Also, during the Depression, Americans were attempting to redeem their dollars for gold and then hoarding that gold like crazy.

End result: President Roosevelt decided to default on the domestically-held debt by refusing to redeem dollars in gold and, instead, confiscating gold and then devaluing the dollar by 40%, which was essentially also a default on America’s trade partners.

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Default #5: Nixon Permanently Severing the Dollar’s Link to Gold

On August 15, 1971, President Nixon abolished the dollar’s link to gold. This was because there had been a run on the dollar in the late 1960s, since the United States was printing far more money than it could possibly back with gold.

So, foreign holders of our dollars wanted their gold, period. Nixon told them to take a hike and permanently severed the dollar’s convertibility into gold.

In effect, it was a 100% devaluation of the dollar. Since 1971, the value of gold has soared from $35 an ounce to today’s roughly $1,600. Which is merely another way of saying that the U.S. dollar has lost an amazing 97.8% of its value since 1971.

Put another way, in 1971, one U.S. dollar would have purchased you 1/35th of an ounce of gold.

Today, one U.S. dollar purchases just 1/1,600th of an ounce of gold.

And put yet another way, for every $1 Uncle Sam borrowed in 1971 that may still be an outstanding debt — he can now pay that debt back now with currency worth 1/1,600th of its former value.

Call it whatever you want, but as far as I’m concerned, that’s an all-out default. In fact, any time the government devalues the purchasing power of its currency, it’s a default, plain and simple.

So even if the government continues to pay its bills, as long as it’s paying them with currency that it plans on being worth less, it’s still a default.

Default #6: Ongoing: The Intentional, Further Devaluation of the U.S. Dollar

Despite the euro sovereign debt crisis being out in the open, the dollar is plunging in value against the Swiss franc, as well as the Aussie and Canadian dollars. Plus, it has just plunged to a 17-year low against the Chinese yuan.

This is all part of “Bernanke’s Secret Debt Solution” for the United States. He knows darn well that we can never repay our debts without inflating them away … by devaluing the dollar.

So do many others in Washington.

The SINGLE BEST thing you can do to protect your wealth is recognize this and take appropriate action by investing in asset classes that will preserve and grow your wealth.

Those asset classes are gold, natural resources in general, and Asian economies.

In fact, all the “great rebalancing” talk you hear out of Washington these days when they speak about the global economy is nothing more than code speak for devaluing the dollar even further, and largely to get Asia — and China, in particular — to spend more money.

Which is precisely what Asia is doing these days. Their economies are running on all eight cylinders!

Best wishes,

Larry

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Your thoughts on “Who says the U.S. has never defaulted?”

  1. The currency has been debased vis-a-vis gold big time since Nixon took us off the gold standard, it’s not quite 1/1600th. Actually, that repayment would be at a rate of 35/1600ths or about 1/46th. But bad enough to be sure.

  2. Larry, my big fear in investing in Asian companies, Chinese particularly, is if the government decides to nationalize all companies or severe foreign investment, you have still lost everything you invested. Is there any guarantee that these foreign governments will not do this?

  3. Larry, you left one out:

    1968: Congress unilaterally reneged on this obligation to redeem silver certificates for silver coin or bars.

  4. The Fed currently owns 1.6T of U.S. debt that the Fed paid for by printing money. The treasury pays the Fed interest on that 1.6T. The fed subtracts their operating costs from the interest and give the remaining interest back to the Treasury.

    Question: If the Fed already default on the currency by buying the debt with printed money, why carry on with the farce by pretending this is legitimate debt? Default on the 1.6T for starters so that we don’t have to pay back the principal and interest on money that was created out of thin air.

  5. I can’t tell if you are just trying to sell something or if you actually have good advice. But I do agree that the US Government should be abolished and we should start over with a new Declaration of Independence

  6. I can’t tell if you are just trying to sell something or if you actually have good advice. But I do agree that the US Government should be abolished and we should start over with a new Declaration of Independence

  7. Larry, David X, anybody…

    What will it take for the Dow to drop 1000 points ? Bad news, more bad news and the Dow won’t even drop 100 pts

    Thanks

    1. Buddy B.

      The DOW is Gold ounces currently stands at about 7.72, meaning that the DOW at roughly 12,500 divided by the current price of gold ($1614 today) yields a ratio of 7.72. Stated another way, it takes 7.72 ounces of gold to buy the entire DOW, once.

      As I understand it, the DOW in gold ounces has traversed cyclically between 1 to 1 and 22 to 1. I am not aware of a time that the DOW was valued at less than an ounce of gold. If a no lower than 1 to 1 ratio continues to hold true throughout the pending economic collapse, that would mean that the DOW would only go as low as the price of a single ounce of gold (currently 1,614, the current price of gold).

      Additionally, if the no lower than 1 to 1 ratio holds up, then the new low on the DOW continues to increase as the price of gold goes up. Gold = $3000/oz? The lowest you’d see on the DOW is 3,000 (1 to 1 ratio). If gold goes to $5,000/oz, 1 to 1 ratio DOW in gold ounces dictates DOW no lower than 5,000. That’s the theory anyway. And if the theory holds and the price of gold continues to rise, the precipitous drop in the DOW some are predicting seems less likely. In fact, if you’ve been following Larry for any length of time you know he is calling for DOW 20k+ long term.

      As an aside, the DOW in gold ounces stood at 22-1 in 2000 (the value of 22 ounces of gold = the DOW). If you had sold your stocks at that time and bought gold most folks would have thought you were crazy. But you’d have made lots of money doing just that. At some point as the DOW in gold ounces approaches 1 to 1 (gold continues to rise, DOW continues to fall) you’ll want to sell gold and buy stocks. That requires selling assets that are doing well to buy assets that are doing poorly. I don’t think most investors have the discipline, or the balls quite frankly, to do that. Me included. So I prefer to keep 40% in cash, 40% in stocks and 20% in precious metals and re-balance once or twice a year. That way you’re always selling the portion of your portfolio making money, and buying the portion that isn’t. Selling high, buying low.

      Just one opinion/theory that hereby opens the floodgates to be told what a moron I am. But I think it beats trading on what you think gold or stocks might do; that’s usually a recipe for making a small fortune…..out of a big fortune.

      In any case, if the historical lowest ratio of 1 to 1 for the DOW in gold ounces holds up, we won’t likely see 1,000 on the DOW (which by saying so now makes it inevitable). As gold continues to go up and the DOW continues to go down, we get closer to the historically lowest ratio of 1 to 1 ratio of DOW in gold ounces, which means the top in gold prices and the low on the DOW. Just one theory. Best of luck.

  8. The problem with restarting the government is that any group that looks to de-throne the existing one, will be locked up for domestic terrorism.

    You’ll be labeled a militia or terrorist, they’ll put some spin on your true efforts, and have the county believing your a looney before you make any progress.

    Until the entire country is brought to it’s knees and forced, out of desperation, to unite and rise up and rebuild…its all just a dream.

    Why are our congress men and woman not held to the same laws we are, the same health care we are, the same social security we are, the same retirement we are(we being the hard working citizen of the U.S.)…yet the government controls everything that affects us?

    What comes to my mind at this point in time…Rome. How mighty they were, and how hard they fell.

    I wish America would revert back to the country it was when the Statue of Liberty meant more to us than just the tourist attraction it now is.

    We are such a weak country morally, financially and physically. How will we defend our nation when the time comes, if we can’t even manage a budget? Iran and China are in the process of working out a bartering system, to bypass the U.S. sanctions against Iran. China currently owes Iran about 30 billion for oil/gas, so China is going to trade them equal value goods to make the deal whole.

    Yet Obama and Boehner look like two children having a petty argument on the playground over the debt ceiling. What are circus the U.S. has become. How can our country expect to focus on important issues when Obama and Boehner can’t even focus effectively on the task at hand.

    The U.S.public infrastructure is crumbling. The majority of our bridges were designed 50-100 years ago with economic lives of 50-100 years. Which bridge will collapse next? Which via-duct will drop on top of traffic next? This would not even have to occur due to earth quake or war, simple wear and tear, combined with a lack of maintenance can bring these steel and concrete giants down with out warning.

    The federal, state and local governments are all financially tapped. Bankrupt if you will. There is no money to fix, let alone build new facilities.

    Then there are the social programs like social security, medicare, welfare. I have accepted I will never see a single dime I put into social security, I just hope my parents can collect until they pass, given that they paid in for their entire lives.

    Lets chat about cities are firing police officers to tighten up budgets, releasing prisoners to reduce overhead.

    As Carol Snow points out above, we need to flip this government over like a pancake, start from scratch.

    HOW is the question…anyone have any ideas?

  9. How does one straighten out the mess in Washington, D.C.? Consult the Declaration of Independence, The Constitution of the U.S., and the profound closing Speech our first True Leader gave as he was leaving the Nation to his successors, President George Washington. The advice is “Sage” and withstands the test of time! See you tomorrow, if I wake up on the right side of the grass. A retired servant of this great nation of ours!

  10. Debt ceiling…the clock is ticking.

    Obama and Boehner remind me of the children I used to have food fights with in the cafe as a kid….so embarrassing is our government to the hard working people of our country. I wonder if they realize the embarrassment they bring to themselves and the rest of them?

  11. “As Carol Snow points out above, we need to flip this government over like a pancake, start from scratch. HOW is the question…anyone have any ideas?”

    By ensuring that the U.S. defaults again this time!

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