US government now has less cash than Google
US government now has less cash than Google by Simon Black
In the year 1517, one of the most important innovations in financial history was invented in Amsterdam: the government bond.
It was a pretty revolutionary concept.
Governments had been borrowing money for thousands of years… quite often at the point of a sword.
Italian city-states like Venice and Florence had been famously demanding “forced loans” from their wealthy citizens for centuries.
But the Dutch figured out how to turn government loans into an “investment”.
It caught on slowly. But eventually government bonds became an extremely popular asset class.
Secondary markets developed where people who owned bonds could sell them to other investors.
Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.
In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.
This practice caught on across the world. International markets developed.
English investors bought French bonds. French investors bought Dutch bonds. Dutch investors bought American bonds.
(By 1803, Dutch investors owned a full 25% of US federal debt. By comparison, the Chinese own about 5.5% of US debt today.)
Throughout it all, debt levels kept rising.
The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable– wars, infrastructure, and ballooning deficits.
But people kept buying the bonds, convinced that the Dutch government will never default.
Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.
It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68% of tax revenue just to service the debt.
Well, in 1814 the impossible happened: the Dutch government defaulted.
And the effects were devastating.