Default And Hyperinflation
This is not the first time in history that the U.S. has stood at the edge of national default. In 1933 during the early stages of the Great Depression the U.S. government was technically bankrupt. However, at that time U.S. bonds were tied to gold, and were issued with the promise that said bonds could be exchanged for gold coin. Investors and foreign banks bought U.S. bonds believing that the gold backed paper would protect them from inflation and that the U.S. government under Roosevelt would honor the gold agreement. Roosevelt did the opposite, inflating the dollar to pay government and military expenses, then refused to allow bondholders to cash in their bonds for gold:
The bondholders lost an incredible sum, while Roosevelt and the Treasury hoarded gold stores and walked away with other peoples savings.
It is important to note that the government under the direction of President Obama has recently declared the continuous issuance of new "Buy America Bonds" apparently because foreign interest in U.S. debt has disintegrated:
This may be another ill-conceived attempt to recreate the same swindle Roosevelt initiated in the 1930's, and BAB's should be avoided.
Roosevelt was able to get away with his clever scam for a number of reasons, including the fact that physical gold was still used widely as a currency in the U.S., and the fact that the advent of WWII obscured the after-effects of default in the public eye. Today, circumstances are different.