Editor's Note: The following is the second of a series of articles reviewing the possibility of a currency crisis in the U.S. Last week's article examined the latest currency crisis warnings from Ron Paul.
There is no such thing as too big to fail. Nations do default on sovereign debt.
While Greece is grabbing all the headlines for its financial woes, they are not the only ones in trouble. In recent times Pakistan, the Dominican Republic, Grenada, Nicaragua, Ukraine, among others have defaulted on their sovereign debt.
In the late 1990s Russia was in the headlines. When oil prices dropped and Russia’s exports tanked, they were more than caught between a rock and hard place. Even a loan from the International Monetary Fund didn’t solve the crisis. It wasn’t until 2000 that Russian began to see the light of day in restructuring its debt.
In the early 2000s Argentina defaulted not only on its foreign debt but domestic debt and foreign contracts. Some countries like Somalia and Zimbabwe have been in default to the IMF for years.
Greece is just another example in a long line of defaulters, says Jeffrey Haymond, dean of the school of business at Cedarville University. "Ken Rogoff and Carmen Reinhart’s book, This Time is Different: Eight Centuries of Financial Follies provides a great illustration on how almost every nation has defaulted before."
But in this age of the 24/7 news cycle, pundits pontificate endlessly, some especially beating the doom and gloom drum. Truth is, while the global economy has been on a rollercoaster, since the World War II, the percentage of all states in default on their debts, as indicated by defaults on foreign currency bonds, has fallen sharply.
There have been times when Nervous Nellies expected the worse and it didn’t happen, or what did happen was survivable. Louis Johnston, professor of economics at the College of Saint Benedict, Saint John’s University in St. Joseph, Minnesota points to an example from the 1930s. "Experts predicted that economies would slump even as countries left the gold standard between 1930 and 1936; in fact, the opposite happened. Currencies stabilized fairly quickly and central banks were able to lower interest rates to stimulate domestic economies. A quick way to put it is that the sooner a country left the gold standard, the sooner that country started recovering from the Great Depression."
—Paul Ruedi, CEO of Ruedi Wealth
Joseph Jones, a partner and economist with Economic Hedge, a consulting and forecasting firm, says that in 2011, former Federal Reserve Chairman Alan Greenspan told CNBC in an interview that the Euro was doomed to fail. "While the Euro is struggling, no widespread Euro-zone currency crisis has emerged. The Euro is struggling because a monetary union was formed before a fiscal union. Traditionally, fiscal unions are formed before monetary unions. Government spending must be under control for a currency to be sound."
Finally, says Jones, "The Euro hasn’t and won’t collapse due to the immense political and social capital being employed. Just recently, French President Francois Hollande proposed forming a Euro-zone government."
Then too, when some thought situations were "hopeless", they were hardly so. "Brazil’s currency crisis in the 80s and 90s was thought to be unsolvable, and proved to be otherwise," says Derek Peterson, a certified financial planner and former vice president at Morgan Stanley. "Brazil’s situation was thought to be unsolvable, given its average rate of inflation at 80% per month and its revolving door of presidents with failed promises of restoring the country’s economy. As a result of economists and regulators’ work, the seemingly impossible situation was remedied."
As for the U.S., Says Haymond, "We are not like Greece in that we do have independent monetary authority – this does not eliminate our problem, but it does enable us to postpone the problem (which actually could make it worse). But in the short-term, because we have both a Federal Reserve and the status as the world’s reserve currency, the U.S. has what has been termed ‘an exorbitant privilege’. We are different than other nations in that we can print more of what the rest of the world wants at effectively zero cost. This is not a luxury that Greece has."
Paul Ruedi, CEO of Ruedi Wealth, says, "I have been hearing about the collapsing dollar for 31 years as an investment advisor. The last I looked, it not only didn’t happen, we are at a 10 or 12 year high for the dollar. This doesn’t seem to stop the perpetual bad news bears."