This Time is Different

“Unexpected increases in inflation are the de facto equivalent of outright default, for inflation allows all debtors (including the government) to repay their debts in currency that has much less purchasing power than it did when the loans were made.”

― Carmen M. Reinhart, This Time Is Different: Eight Centuries of Financial Folly

Working and reading indoors at Tara this frosty morning in the Southern Tier, although the front porch does look inviting since we put the plants back out this weekend.

I will miss my porch, although it's all for the best I suppose. We are reaching an age where financially and physically we won't be able to maintain the old girl. Condo living from here on out will become our norm. I just wish we had an outdoor space like this.

I'd thought, as I laid in bed plagued by my usual insomnia, that I'd write about how much better it would be for us and for the world if the United States population looked for moral and ethical guidance to Plato and Aristotle, Marcus Aurelius and Epictetus, rather than a children's book with talking donkeys and armies that cut off their foreskins the night before the big invasion to prove their fealty to a not-very-nice deity. Joshua 5: 4-10. There's just so little grist for the exercise of navigating a life well lived in the Hebrew Bible, while the Gospel directs a life almost no one actually leads. "Sell all your possessions and follow me." It's such a rare occurrence we remember by name the folks who've taken that path over the millennia.

But rather than sounding like a grumpy ex-priest, which I guess I am, I thought I'd revisit a topic that fascinated me during my time in academia--the nature of sovereign debt defaults.

I know what you're thinking--how could that be interesting, and why talk about it now?

Starting with the second inquiry, this morning's headlines included a piece about the prediction of Ray Dalio, founder of Bridgewater Associations and a guy who's accumulated more wealth than everyone who's ever read this blog will collectively approach, that sovereign debt default under DJT is a real threat.

https://www.cnbc.com/2025/05/19/ray-dalio-says-risk-to-us-treasuries-greater-than-what-moodys-says.html

We all knew that, generally, or at least those of us with a knowledge of the man's history and a pipeline of information untainted by Fox News. But the interesting detail here is that Dalio points to a time-honored means of achieving a technical default--simply debasing the currency when it's time to repay.

Think of it like this: you loan me the funds to buy a new TV, payable at 6% interest on a 24 month balloon. But the debt is denominated not in dollars but in "Donks", my very own currency I use around the house to buy things. When the maturity date arrives, I find myself a little short of Donks, and turn to my trusty printer to create enough to pay you back, with full interest.

A default? Not on paper, anyway. You got your 112 Donks. But I've now increased the supply of Donks without adding any value, and when you go to Wegmans those Donks are going to buy you a lot less.

This is a unique moral hazard for countries such as the U.S. that have the luxury of debt denominated in their sovereign currency. So long as our Treasury Department was run by grown-ups the world may have understood the risk, but it was discounted. No more. The reason you're seeing the yields on Treasuries rise, and the return for investors shrink, is the realization that this administration is fully capable of this stunt, has in fact signaled with the "Big Beautiful Bill" that it intends to do exactly this by piling on the deficit at a reckless pace even as it's triggering an inflationary spiral with the new tariffs. Your Donks are going to be worth a lot less going forward.

But I guess we've been here before, and it's been a lot worse.

One of my favorite essays back when I taught the law of debt came from Kenneth Rogoff and Carmen Reinhart, entitled This Time is Different. It was later made into a book in the wake of the 2008 Great Recession. A rather lengthy abstract can be found here:

chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.nber.org/system/files/working_papers/w13882/w13882.pdf

The study goes back nearly 800 years to analyze sovereign debt defaults and their causes. Wars are a biggie, but so are periods of capital inflow that lead to very bad decisions about heaping on debt that can't be sustained. But back in the day, when we had the sorts of sovereigns DJT seeks to emulate, they had multiple methods of addressing the problem we don't see much today. As described above, they engaged in their own form of currency debasement, shaving the edges off their coins or reducing the amount of precious metal used to make them. Ever wonder why we have reeded edges on a dime or a quarter? That's why.

At the extreme end of debt restructuring tools was simply executing one's creditors. This was a favorite in France before the Revolution, when they switched the model to simply executing everyone. And the Jewish population typically played an outsized role as a lender, so the sovereign had an incentive to let his subjects murder his Jewish subjects and loot their businesses. Jubilee, baby!

Time to start getting ready for depositions in a little bit. The worst part about the practice of law, the part that strips away the pleasure of the intellectual exercise is, well, the practice of law.

Here we go.