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What happens when you default

July 31, 2011 - Harry Eagar
Economic history is not taught in schools, and, for most people, it's a dreary subject, so they don't find out anything about it after they've left school. I myself find it fascinating and have studied it for over 40 years, but I admit that there are easier things to do, like watch TV.

That does not prevent people from holding decided opinions about how economies work -- what I call inductive economics, in which a set of principles is said to have been discovered (perhaps in the works in Adam Smith, perhaps in Marx, or somewhere), and understanding these will allow one to predict, even control the unfolding of economic events.

No one who has studied economic history believes this nonsense. Economic evolution is like biological evolution in that it's an arms race: Whatever one actor does, some other actor tries to counter. Economics cannot be forecast and it cannot be modeled.

An economic historian, Christophe Chamley, has a short column at Bloomberg News which recounts what he calls the first default on sovereign debt, in Spain in 1575. (I would say there were earlier ones, in Venice, but I think he was looking for the first one that contained mostly modern aspects. I still think Venice has priority, but that's not germane to Chamley's tale.)

His conclusion is:

"What’s the message for the House Republicans today? First, don’t overestimate your power. Second, history stays with us. Spain’s default is 424 years old, but its story is still being told and may, to this day, be affecting that nation’s perceived creditworthiness and cost of capital."

But read the whole thing. And add, what Chamley only glancingly refers to, that Spain had taken on unwinnable wars (in the Netherlands) against people who would rather die than accept Spain's religion.


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