Inspired by this thread
http://boards.straightdope.com/sdmb/showthread.php?t=594183
where people have said ‘paying a student loan is the least of your problems’
Well what would be the most of my problems? Will it really require shotgun shells and such?
I’m not convinced default of the US govt, will be as bad as that. Convince me; or tell me some things that will really happen.
I’d like to keep it factual, but if it requires a move to IMHO, so be it.
Moved from GQ to IMHO.
samclem Moderator, GQ
US debts are mostly denominated in dollars, and the US government has the sole legal right to print those dollars. So an actual refusal to pay an agreed-on dollar debt is unlikely. Instead, lots of new dollars will be printed and creditors will receive the number of dollars that were promised - but with those dollars the former creditor will be able to buy, say, 90% of what he could have bought with the dollars he loaned.
Such creditors will feel cheated. Collectively, they will say “If you expect us to make further loans, you’ll need to pay a much higher rate of interest, to make up for the potential loss in dollar value.” This will raise the cost of further debt, increasing pressure to print still more dollars.
In the process, everyone who has savings denominated in dollars will see their value steadily diminish. This will cause enormous disruptions: People will no longer want to have their money in dollars, and instead will hoard gold, silver and other forms of “hard” assets (driving up the price of these). It will be hard to buy anything on credit (at least, dollar-denominated credit) since sellers will suspect that repayments won’t be worth much.
A bit alarmist and a questionable resource, but a fun presentation anyway:
http://www.stansberryresearch.com/pro/1011PSIENDVD/PPSILCCP/PR
The Chinese government, which owns a vast amount of dollar-denominated debt, would collapse.
A hint for those who don’t want to sit and listen to Stansberry’s endless posturing (and uneven volume, and agonizing monotone) in the above presentation – if you try to close the window, you’ll get a box asking if you’re sure. Click on “stay on page,” and the video will be replaced by the text of the presentation.
Short version: The U.S. prints money to finance its debt, which is only possible because the rest of the world uses dollars as reserve currency, and oil is priced in dollars. In 2011, the world will abandon the dollar, and this practice will cause massive inflation, economic upheaval, and misery. You can protect yourself by buying Stansberry’s investment guide. And he got 2008 right, so he’s right about everything!
Oh, so that’s what they keep flogging on XM. I figured if they aren’t going to tell me his thesis, I’m not going to go to some website.
Should the Chinese (and probably also the Japanese) government believe that a US default is imminent, then they’d liquidate that debt as efficaceously as possible. They will then likely buy that debt back, at very advantageous rates.
The key aspect is that the USD would lose it’s reserve currency status, and probably never regain it. That would mean demand (and price) for USD would fall. That would be good for US export trade, but it would mean the cost of domestic funding would increase substantially. People lending to finance USD denominated assets would want a much higher risk premium than currently applicable.
How would that work? It can’t, unless China is the only entity in the world to predict the dollar’s collapse, and then are the only ones who think it will later rise. You can’t time the market that way. If anyone starts selling large amounts of dollars, what happens to the dollar? Supply and demand, there’s a lot of supply and little demand, so the price falls.
That means that entities that hold large numbers of dollars would see the value of their holdings fall before they could sell it all, and the attempt to sell everything means the value falls faster. This creates a classic market panic where everyone is trying to sell, no one is trying to buy, and the price plummets to the floor.
We are talking about default on debt rather than devaluation.
There may be a populist notion that default might just be a cheap and easy fix, some supersized Chapter 11 solution, but it’s not.
I’m sure Bernanke doesn’t want to be the Fed Chairman in the history books who does that. I’d be confident it’s not something he can do at a personal whim.
It would be expected, in the situation that default were to be contemplated, that there would be a significant dialogue with the creditors first, and there would also be a significant number of discussions on the Hill. That’s a whole lot of clear signals to pick up on.
The timing is less of an issue than the opportunity to act.
The USD will drop because it will lose reserve currency status on the default, then the Chinese/Japanese may decide to buy the debt in whatever form back. When/whether the USD exchange rate rebounds is immaterial.
I think that the US would be quite co-operative with the creditors because you really need those creditors to come back and take up that debt. And on the whole, the creditors don’t want the US to be overwhelmed by debt, you are such wonderful customers to have.