So what if the country goes bankrupt?

People on both sides of the political spectrum have been talking about it since the crap hit the fan 2 1/2 years ago.

But I’ve never heard anyone spell out in concrete terms what it means.

If the country does go bankrupt, in what specific ways will the average man and woman be affected in their daily routines?

Someone asked an expert this exact question on NPR yesterday. IIRC the answer was basically world financial chaos; since we’re considered the most stable/reliable borrower, if we defaulted, no one would know who to trust.

Extrapolating from this, I speculate that it might not hurt the US all that much in the short term, but it could be pretty damaging to our long-term financial power.

Well, worse case scenario, no one can afford to buy any more Treasury bonds so we just keep printing up money to pay our debts (which we can do as the reserve currency for the world). However, the value of the dollar will soon drop and no one will want to buy any more dollars. And it will continue to drop as people who have been buying up us dollars try to get rid of them.

For the average man on the street, this may initially lead to short term job growth as a week dollar is good for domestic manufacturing. However, that will be short-lived. Soon rising inflation will erode your savings and purchasing power making you and everyone else effectively poorer. Unemployment will soon rise as companies have no one to sell to and soon everyone is fucked again.

Best case scenario: the world accepts this as a one-off for the most part, but US treasury bonds are no longer regarded as the sure thing they were, and the interest rate takes a hit of a couple of points. This increases the interest we have to pay on the national debt by a few hundred billion per year.

England repossesses the place.

More like China with the way things are going now. :eek:

Honestly, and I’m not happy saying this, but it may TAKE that sort of default to straighten out our fiscal issues.

The internal conflict among the American electorate is:

  1. We want high services
  2. We don’t want to pay for them

Combine that with our system of elections and you get pols for whom ‘debt’ and ‘deficits’ are just a cost of doing business.

What happens if such a default occurs? Who knows? Maybe having to pay higher interest rates on debt will be a good thing as it will limit our ability to borrow? Then again, maybe not.

Will we selectively default on some particular debt series while servicing others properly?

Will a weaker dollar bring manufacturing back to the US while reducing earning power.

It’s a tough issue. And I see no indication that either side in Congress wishes to deal with it appropriately.

I dunno, JC. I’m a confirmed skeptic of the ‘if things get bad enough, then maybe they’ll get better’ theory, pretty much across the board. Generally when things get worse, it just leaves people (or nations) in a worse position for solving the problems they already had.

It would be worse than anything you have ever seen.

The “full faith and credit” of the US is the only thing supporting the worth of the dollar. Without that, the value of the dollar collapses. Since oil is priced in dollars, gas immediately goes up to $10 a gallon or more. The Fed, in an attempt to keep the economy from utter collapse, “monetizes” the debt by buying up Treasury notes. This leads to hyper-inflation which basically destroys the world economy as the biggest banks in the world fail due to their exposure to US debt.

Think not? Markets anticipate events, rather than react to them. Look what happened when it was thought Greece might default on its debt. The markets went ballistic. Greece has a GDP of 305 billion (US dollars). The US has a GDP of 14.7 TRILLION. What do you think would happen?

Basically, it’s total worldwide economic collapse.

I would agree. It’s like saying that that the cure for heavy debt is to become homeless.

Fortunately, the “full faith and credit” is also supported by the fact that we are the largest economy in the world (with perhaps the exception of the entire EU).

I never did understand the whole hubub over Greece, considering that their GDP is roughly equivalent to the state of Maryland.

Considering the rampant innumeracy epidemic in the US, I think hordes of people will experience their heads exploding when they start seeing currency with 10 or 20 zeroes on it.

What does that mean, though? Is our financial system truly so illusory that the masses would starve if faith in it was lost? Or would just a slightly smaller number of people upgrade to Blu-Ray this year?

Defaulting on our debt would be like declaring bankruptcy on a debt that’s roughly equal to our annual income.

Our GDP this year and the total debt are both about 14 trillion. Now, if you have an income of $40,000, and you owe $40,000 on your credit card, you’re in trouble because the interest on the debt will be tremendous. But if you make $40,000, and owe $30,000 more on your mortgage, and have only $10,000 in credit card debt, then you’re fine, because the amount you owe on your mortgage is at low interest, and can be paid off on schedule.

And we’re more like the second situation. We have a large debt, but the interest we pay on our debt is very low. So we aren’t going to face bankruptcy, as long as we don’t keep adding to the debt. We also are likely to have our income increase in future years, so that will make paying off the debt easier.

Also, the country has a trick that individual debtors don’t have. We can always increase inflation, and then pay back our debt in inflated dollars. Of course, this means that future borrowing are going to have to be at a higher interest.

But goverments invariably prefer inflation to default. The problem small Eurozone countries are facing is that they aren’t able to inflate their currency and pay back their creditors with inflated dollars, their debts are in Euros which are controlled by the Germans and the French.

I’m also curious as to what exactly that means.

I have no idea about these financial things, as my impending personal bankruptcy attests, but to my lay-person mind it would seem that if there’s actually a total worldwide economic collapse, aren’t we all in the same boat? I mean wouldn’t that simply mean that everyone just starts over from zero, in which case those possessing the raw materials and intellectual property are the ones who will ultimately prevail, in which case most countries would pretty much end up right where they already are.

Or am I completely misunderstanding the issue?

What election does this pertain to?

Look what happened when the banking system nearly collapsed. Banks stopped lending, it became difficult to value assets, states and cities depending on regular turnover of securities got screwed when the market froze up, and uncertainty and the lack of credit resulted in crashing demand and lots of layoffs. Now imagine what would have happened if the government (ours and others) had not stepped in. Who would be stupid enough to risk expansion if the US government became unstable?

Yes, you are completely misunderstanding the issue.

Without the ability to take out financing, those posessing raw materials and intellectual property would be unable to acquire capital for creating the value adding “means of production” to turn those raw materials and IP into usable goods and services. Collectively, they would be unable to hire workers and with no workers earning money, there would be no one to buy those products. It creates a vicious circle.

People also have a fundamental lack of understanding of what a dollar represents and what debt is. A dollar is simply a unit of measure of work. One dollar of your labor affords you the ability to acquire a dollars worth of goods or services provided through someone elses labor. Of course that value is all relative and constantly changing.

By extension, debt is a promise to provide a bit more of your labor and services over time in exchange for having the ability to use the fruits of someone elses labor now. eg You can live in a house right now, but you have to work for the next 30 years to pay for it. So what is really happening when everyone defaults on their debt is that people are taking more out of the system than they put in and the system stops working.

Blu-ray. Food. Clothing. Homes. so on and so forth

Home mortgages are typically 15-30 years long. Most T-bills are 3 and 6 months. So comparing the US debt to a mortgage only works if you specify that it’s a mortgage that we have to reapply for every six months.

If investors begin to think a default is a real possibility, interest rates will rise very, very quickly.

Except that we are, and have been, and plan to.

And our planned expenditures are rising even faster.

It’s not. Unlike your mortgage with the bank, the US government can print more money. Especially since the dollar is the reserve currency for the world. Not that that is without it’s own problems.

True, we can try inflating our way out of it; as you note, though, it has it’s own problems, not least of which is that it would itself jack interest rates up – if US inflation is running at 8%, nobody’s gonna buy T-bills for less than 10 or 12%.

More fundamentally, once you start an inflationary cycle, it’s hard to keep it under control, and can have its own very bad consequences, as Nixon, Ford, Carter and Reagan would attest. And certainly if it gets really loose, hyperinflation is a nightmare on a par with a default.