US nearing epic financial collapse. What happens then?

As a country, the US is speeding to the economic event horizon… we don’t know exactly where it is (at least that’s what they tell us sheople), or when we will reach it, but sooner than later, countries like China and Russia are going to pull the plug on loaning us money. It’s mathematics. And it’s reality. They simply cannot continue to loan money to a country that will never be able to pay them back.

China, Russia and the rest must know this.

Is Washington hoping that the world will think like they did and believe that we are simply too big to fail? Will the Chinese and Russians never call due their loans and stop the flow of money because if they do it will plunge the world into a depression worse than the Great Depression or any other global economic crisis?

I am concerned that the US Govt. will never be able to dig us out of the incredible debt hole we find ourselves in. And like the Wall St. banks, they believe that even though the Chinese, Russians, and any other country dumb enough to loan us money know they are pumping money into a bottomless pit, they wont stop for fear of a global economic catastrophe.

I don’t know if they look at things the same way we do.

Personally, I think the Wall St. banks that were going to fail should have been left to fail. That is, after all, what the free market and capitalism is all about, isn’t it? They got too greedy… they made bad investments. Like any other company or industry, they should have paid the ultimate price… liquidation. There would have been some survivors, and those banks would get stronger as a result. But because of political connections and considerations, deals were made to save the banks and screw the taxpayer. Thank god we still have all of those financial geniuses employed on Wall St.!

So, what say you all? I read (I looked, and couldn’t find a cite, sorry), that China and Russia actually met last year to discuss their loaning policies toward the US, but decided not to pull the plug completely because of the fear of what might happen. Is this true? I don’t know. But it sure sounds plausible.

Indications are that we are headed for a double dip recession. Housing and fuel prices are going to take hits again this summer. More unemployment, more people defaulting on loans, more foreclosures. I don’t know if all this will happen, but I see a real possibility here, especially if we continue to borrow money faster than we can pay it back. Maybe the Chinese will accept a reverse mortgage on Alaska? Or that’s more Russian, we’ll give the Chinese San Francisco and the west coast.

Anyone have any thoughts? Are things as bad as I think, or are things better than I think? Will another ME war (say with Iran) help delay the inevitable, or is the inevitable going to pull us all down? Can we all imagine runs on the banks, and no cash to be available? The FDIC is a bluff. There isn’t that kind of money anywhere to pay all depositors. It’s just insured for that much by the federal govt, who isn’t the best credit bet right now.

Have any of you gone to your bank already and taken your money out and put the hard cash into a safe? How about buying gold and silver and platinum? Not mutual funds, but the actual metals? Anyone take any other proactive steps to prepare for the worse?

Or is all this just BS?

Have you actually, you know, looked at the facts? List of countries by government debt - Wikipedia <- sort by debt to gdp ratio, and the US isn’t even in the top 5. Interest rates on public debt are, if anything, going DOWN, not up, as you would expect if lenders thought there was a chance “the US” wouldn’t be able to repay.

It’s not even the highest it’s ever been. History of the United States public debt - Wikipedia

In short, whatchootalkinabout, willis?

Tabby,

You have given me some things to read.

This is strange, because I am sure I’m not confusing deficit and debt.

But I did think we were deeper than we have ever been.

2 things I will do. I will go through your links, and I will also find the article that gave me the ideas that I spouted off about in the OP

Willis

Here’s another link for you Interest Rate Statistics | U.S. Department of the Treasury

It’s the treasury’s chart generator for the interest rates on government bonds. Only goes back to 1990, but it’s good enough - I did a chart for 2007 to date for 10 year bonds, and the interest rate has been going down and down. Nowhere near what you would expect if the US was in any danger of default.

Keep in mind that when you see scary numbers like 110% of GDP!!, that’s just for 1 year of GDP. It should really say “annual” GDP. This means that the US could pay off the entire debt in a year if it so chose to do so, but it doesn’t because if you got money that cheap, you should be borrowing it too! At a 3% interest rate, you could do a lot of good with borrowed money - investments for the future, which will almost certainly pay more than 3%.

If I owe a bank a million dollars, it’s my problem. If I owe a bank a billion dollars, it’s the bank’s problem.
China holds a ton of US debt. If they stop buying US bonds… the value of the dollar will decline and the renminbi will rise. Suddenly that pile of debt is worth less to them. Meanwhile their export industry is being clobbered.

What would happen in the US? If this happened today, we’d be in great shape. The Fed would simply buy US bonds rather than the Chinese: US investment would not be affected and the decline in the dollar would lead to an export boom.

During normal times though, a declining dollar would be inflationary. The Fed would attempt to tighten in response, leading to higher interest rates and lower residential construction and auto purchases.

Short story: don’t panic. The key thing to remember is that the US is borrowing in dollars. Things would be different if the US were floating bonds denominated in Euros or Yen. But they are not. Chronic budget deficits are a problem as they tend to sap investment during times of expansion. And spiraling health care costs combined with an aging population present a serious policy challenge. But I’d worry less about the pyrotechnics. The next financial crisis will originate in the same place the current one did: it will occur due to an insufficiently regulated financial sector, backed by wealthy lobbies and compliant ideologies.

Go-to blog of 2 financial crisis experts: http://baselinescenario.com/

How do you “call due” a loan?

In this context you don’t. In very simple terms the US isn’t actually borrowing money per se, well not in the sense of going to a ‘Bank’ and asking for a loan.

In a gross oversimplification:

The US Government issues a bunch of bonds (Treasuries), and offers them to anyone who wants to buy them. The bonds effectively say, (as an example) buy me for 950 dollars now, and I will pay you 1,000 dollars in 12 months time. (Various types of bonds have terms from 1 to 20 years) The longer term ones often also pay a % return annually or some such.

In this context calling due a loan, would be most analogous to the foreign country not buying the next issue of bonds, once theirs matured.

That’s ludicrous. To pay back a debt worth 100% of the GDP, a country would have to sell every single thing it produces in a year to get the money. That means no buildings, no oil, no food, nothing.

Reasonnably, a country, even with drastic efforts, can only pay back in a year a small percentage of its GDP. Say 3 %.

Alternatively it could just print one year of GDP worth of money, but that would be as bad as defaulting.

Most of the US government debt is actually owed to US investors.

Of the foreign nations that hold US debt, Russia is only 8th on the list.

Factbox: China leads list of biggest U.S. creditors | Reuters

Indeed. Yet.
Now, if there was a danger that states might start to look at the Euro, what could the US do?

Maybe invade an oil rich country that suggested they would start trading in Euro’s?

Try and make the Euro unstable?
How would they go about that? Hmm, maybe take away some AAA statuses?

OK, I’m confused.

I read Tabby;s links, and there are two small problems. First, the data is 2 years old. That might not seem like a lot, but there have been large spikes in the debt in the last 2 years, An interesting quote “Under President Barack Obama, the debt increased from $10.7 trillion in 2008 to $15.5 trillion by February 2012,” That’s amazing. And depressing.

Also, the US credit rating has been reduced by Moody’s to AA+ from AAA (these were also the geniuses that were rating the investment banks AAA right up to the near implosion, so I don’t know how much credibility to give it.) Still, it’s the first time the US Govt’s rating has dropped since the beginning of rating these…

I also don’t understand your idea that if the govt wanted to, they could pay off the debt in one year. the only way that could occur is if the govt didn’t have any financial obligations anywhere else, and we all know that’s not the case.
Still, many of you seem to think it’s not as bad as I’ve been led to believe. That’s good. But it’s not good, is it? I mean, what this government is doing is rolling the dice on future revenues. What the Obama administration has done to the debt in 4 years is scary (at least to me); They’ve decimated future piles of money (money set aside for Social Sec and Medicare, for example), that when the time comes to pay this money, the cost will be much higher than it was when the money was collected, right?

I keep hearing about this second housing bubble coming this summer. Another massive round of defaults are due to hit (I don’t know if this is true or not, it’s just what I’ve heard). Anyone else hear this? And if so, what does this mean to our economy?

Is the thought here that the US cant and wont fall into another depression because they are “too big to fail”?, and countries like China are almost forced to keep feeding the beast, or they will lose everything they’ve loaned?

I am not an expert, but can regurgitate what I hear on Radio 4:

Apparently the role of ratings agencies is different and less important when considering government bonds. Ratings on debt packages are intended as a buying guide for the purchaser (however fucked up this system actually was) and have a direct impact on the price of the package.

But while the agencies will happily rate government bonds the rating have no real-world effect because there is an efficient bond market that operates with exactly the same information. The only accurate rating is the current return on bonds in the market. And while there are investment funds that only invest in AAA rated bonds, US bond returns have declined (which is good) since the down-grade so you could easily argue that they’re irrelevant.

Having said that, I wonder how much of the price of US debt is less down to confidence in the US economy and more due to the continuing uncertainly about the Euro. UK bonds have seen a similar, though reduced, effect. Where else are bond traders going to put their money?

Thus, considering how much is at stake, would it be totaly wild fringe conspiratory thinking that this unstability of the Euro might not just have been ‘the market at work’?

You mean that the US (or some other party) deliberately downgraded the Eurozone to make the US a superior investment target? Well, ignoring the fact that the US got downgraded as well the Euro crisis isn’t caused by the downgrade, it’s caused by having members with collapsed economies that are at a real risk of defaulting on their debt and few means to combat their predicament. The downgrades are an effect in this case, not a cause.

Well, if you look at the sequence of events question marks remain.

First Moody’s (was it?) downgraded Greece, followed by talk about downgrading of Italy and Spain.
Only after direct European protest that Moody’s et altra only looked at European countries did they in fact state that they would look at the US too.

Besides, in the Euro’s case it is very much a case of Government Bonds being evaluated, instead of the economy itself. It’s the State’s household and fiscal management that is the target of scrutiny.
This with seperate countries, not the Euro-zone as a whole.

Looks just a tad like divide and conquer to me.

Yes, but if Wikipedia is correct, then the countries with most debt are mostly places like Zimbabwe that we probably don’t want to imitate.

Yes, but consider that five years ago, lenders didn’t think there was any chance that Greece or Italy would be unable to repay. Surely the chief lesson from the financial crisis of the past five years is that the world’s financial system does not act intelligently to predict debt problems.

Yes, but the only time our debt-to-GDP has been higher was during WWII. After WWII ended, spending went down automatically.

I would not say that a debt crisis is guaranteed to happen in the United States. However, I think it would be foolish to ignore the possibility. We face a compendium of several problems: massive debt, sluggish economy, complete lack of leadership from Washington. History plainly teaches that national debt problems can destroy countries, including large countries.

I have repeatedly read threads like this where OP’s seem to equate the notion of government debt with personal debt. They are not at all the same thing, for two very important reasons: (1) governments can theoretically live forever–or at least far longer than the earning life of the average person, and (2) governments have the power to increase their income unilaterally. As long as investors believe a nation has these two qualities, governments need pay only the accumulating interest on their debt.

Suppose you acquire a typical 30-year mortgage for a not-at-all unreasonable value of 2-3 times your annual income (i.e. 200-300% of your “personal GDP”). The bank gives you this loan because it’s sure you can pay it off in 30 years. Now imagine if the bank believed you would live forever and that you could take as much money as you like from your neighbors–using the police to help you if necessary. Obviously the bank would think you’re an even better bet to pay off, so they’d likely lower your interest rate and practically beg you to take more of their money (because you’re a better investment risk than a vault).

Of course, all of this depends on the confidence investors have in your continued existence and your ability to unilaterally acquire cash. That confidence will start to fade if your spouse demands you get rid of your fancy car before you make this month’s mortgage payment (see: Debt-ceiling debate last summer), or your wealthy neighbors invest in armed guards of their own to stop you taking extra money (see: Grover Norquist and Washington lobbyists). Those are rough analogies, but they illustrate how the actual size of the debt (in terms of GDP) is not the most significant factor in determining the US credit rating–and the fact that US sovereign debt remains historically low indicates most real investors don’t believe the alarmists.

Investors have responded to the downgrades with a big yawn. OK, the U.S. no longer has an AAA rating according to Moody’s. It’s still regarded as a very safe investment. It probably doesn’t help that the financial crisis showed the rating agencies often have no idea what the hell is going on.

As a reminder, the U.S. has something like $15 trillion in debt, and $5 trillion is held by foreign investors, including $1.1 trillion is held by China. Japan owns almost as much. Russia’s holdings, whatever exactly they are, are much smaller than that.

Your concern is what- that the U.S. GDP will collapse or shrink precipitously?

If by “pull the plug” you mean China was considering selling the $1.1 trillion in debt that it owns, I don’t think that’s plausible. I think China has about the same amount of debt it had a year ago. It had been selling small amounts of it in recent months, but it’s nothing you would call pulling the plug.

I don’t know where you’re getting this because that’s not at all clear, or where you got the bit about another housing bubble when housing sales are so low. Unemployment is high but has been going down steadily, and if it goes up because more people are looking for work instead of because more people have lost their jobs, that’s not intrinsically bad either.

It actually is a good credit bet. Look at Europe.

A lot of it is, yes.

Broadly, a person can act this way, too. We never get loan terms to pay only on interest if we choose, but credit cards come pretty close. You could carry a revolving debt for a long, long time, if money not spent paying principle could yield a better return than your interest rate dings you on your principle. That’s what consumers don’t have access to, but governments do. (Just to support your great post.)

Remember that China pegs its currency partly to the dollar. A falling dollar will lower the value of the yuan as well.