So, this editorial argues that no matter what the government does to stave off default, all that matters is the opinion of the world markets. If they lose confidence that the U.S. and the dollar is a good investment (and they may already have), it’s too late, and such efforts are futile.
I don’t want to debate that, exactly — that’s for Elections, it seems. What I do want to examine is what happens if it IS true, and international investors look elsewhere. What’ll our economy look like after that? What’ll everyone else’s? Winners/losers (however you want to define the terms; there may very well not BE any winners if a country that becomes the new favorite has to take a huge financial hit for it to happen, for example)?
In the short term, the interest rate on US debt would have to rise to make buying them more attractive. There are certainly worst case scenarios where the interest on our debt spirals out of control while political gridlock, among other things, arrests any real economic growth. However, the reality is that such a scenario is unlikely to happen given that there just aren’t that many more productive, available, and/or safe places to invest your money (even considering our political and economic situation). People don’t lend us money out of the kindness of their hearts; they do it because it the best option available. In order to make it a demonstrably worse option, you’d either need a LOT more safe investment options elsewhere, or to have the US government really, really fuck up and do nothing to address the issue for an extended period of time. That’s unlikely in large part because if the dollar is devalued to that extend, everything else is gonna be dragged down with it.
Quartz: Who’re you referring to, me or brickbacon? If me, then my question was about more than the dollar as reserve currency, just as the editorial in my OP was (though I admit my topic line could’ve been clearer): it’s also about general investment dollars going out of stuff like U.S. treasuries and businesses and going elsewhere entirely, like Europe or China. (Not to mention any other similar reactions you think the world could have — I don’t know what all of the possibilities are, thus this thread.)
I seriously doubt it’s going to happen any time soon. You’d need to have some place more attractive for international investors to feel secure in, and right now I don’t see any other nation emerging with that sort of clout wrt their currency. If Germany had it’s own currency then that would be a possible target, but the Euro is still pretty shaky. China’s currency is pretty obviously been deliberately deflated to maintain their trade (im)balance, so that’s not a good choice…besides there are other stability issues there that I think would preclude large scale investment in their currency as a reserve. Japan also has issues, but I guess that would be the second choice right now if confidence in a US currency collapsed.
I’m not sure what a post-America world economy would look like, to be honest. I suppose one model for this would be what happened after the UK lost it’s dominance as the worlds reserve currency, superseded by the US? Everything used to be based on the pound and now it’s tied to the dollar. From the UK’s perspective and the worlds perspective it wasn’t a huge shakeup, though there were certainly winners and losers. But I’m not sure if world trade was so intricately tied to the UK as it is today with the US, so I’m not sure if there would be more serious disruptions now.