# What would be the effect of a US sovereign debt crisis? **URL:** \ **Category:** Great Debates\ **Created:** [September 25, 2010, 4:25pm UTC](https://boards.straightdope.com/t/what-would-be-the-effect-of-a-us-sovereign-debt-crisis/555017 "2010-09-25T16:25:42Z")\ **Posts on this page:** 6\ **Page:** 2
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [September 28, 2010, 2:02pm UTC](https://boards.straightdope.com/t/what-would-be-the-effect-of-a-us-sovereign-debt-crisis/555017/21 "2010-09-28T14:02:17Z")
> [@athelas](#): > > From [the blog](http://www.marginalrevolution.com/marginalrevolution/2010/09/the-shape-of-things-not-to-come.html) of an economics professor who’s usually pretty conservative about his prognostications: > > > [@](#): > > > > 1. Obamacare won’t be repealed or declared unconstitutional, nor will Republican candidates be running against it six years from now. Trying to repeal parts of it would likely backfire and destroy the private insurance industry, given that the process would be ruled by public choice considerations rather than rational technocracy. We still would end up with a larger public sector role in our health care institutions… > > > > 2. Social Security won’t much change, keeping in mind that the number of elderly voters is growing larger every day. Given all their elderly white voters, the Republicans are already “the party of Medicare.” The Democrats have become “the party of Medicaid.” That locks three major programs into place, more or less. I don’t hear serious talk of major cuts in defense spending. > > > > 3. Taxes won’t be raised much (do the Dems seem to have great love for reversing the Bush tax cuts?), spending won’t be cut enough (the recent Republican document is extremely weak), and within twenty years we will have a sovereign debt crisis in the United States, as one day a Treasury auction won’t go well. I’ll predict, but not favor, the emergency passage of a VAT, a’ la TARP, which will restore fiscal stability but lower the long-term rate of growth. When that time comes, the VAT will indeed be necessary, though ex ante I would opt for less social protection and a higher rate of economic growth. > > I’m inclined to agree: every government program has a huge entrenched interest behind it. Seniors want Medicare and Social Security, public sector unions want to ratchet up bureaucracy, tycoons want corporate welfare and more anticompetitive [regulatory capture](http://en.wikipedia.org/wiki/Regulatory_capture), and the huge number of poor who [pay no income tax](http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1) have every incentive to push for more government spending. On the taxation side, there is significant resistance to increasing taxes and [history suggests](http://www.econlib.org/library/Columns/y2009/Hummeltbills.html) that we can’t actually squeeze out a larger fraction of tax revenue compared to GDP. The only popular kind of tax - on the rich - will raise only a small amount of revenue. > > Put two and two together and I don’t see any way for the US to avoid a sovereign debt crisis. My question is: what effect will it have on ordinary folks? Will it be a simple matter of the government saying hey, we don’t actually have as much money to spend as y’all thought we did, or will it have a shock on the broader (private-sector) economy? When you say the professor is conservatice, do you mean "C"onservative? We CANNOT grow our way out of this mess, maybe if we were China or some other developing country but mature economies do NOT achieve the sort of growthr ates taht we need to grow our way out of our problem. We will eventaully HAVE to reform medicare/medicaid and social security. They have been reformed in the apst and they will be reformed again. The tax repeal for the wealthy is not insignificant. Heck just reinstituting the estate tax is worth a couple of hundred billion over ten years and the repeal of the capital gains and dividend income preference is worth at least that much. If we do have a sovereign debt crisis, we will see our currency collapse and our interest rates jump as people start dumping their treasuries and our economy would collapse. A better (although not good) alternative would be wage inflation which would trigger asset inflation and currency inflation. People talked about how this would trigger a collapse of the world economy but it wouldn’t be as bad for us as the alternative. ---
**Author:** ![marshmallow](https://avatars.discourse-cdn.com/v4/letter/m/df705f/32.png) [@marshmallow](https://boards.straightdope.com/u/marshmallow)\ **Post date:** [September 28, 2010, 2:39pm UTC](https://boards.straightdope.com/t/what-would-be-the-effect-of-a-us-sovereign-debt-crisis/555017/22 "2010-09-28T14:39:27Z")
You won’t have to worry about internal civil violence or an IMF riot. The DoD, Homeland Security and the intelligence communities have plans in place. ---
**Author:** ![UltraVires](https://avatars.discourse-cdn.com/v4/letter/u/ecccb3/32.png) [@UltraVires](https://boards.straightdope.com/u/UltraVires)\ **Post date:** [October 4, 2010, 1:35am UTC](https://boards.straightdope.com/t/what-would-be-the-effect-of-a-us-sovereign-debt-crisis/555017/23 "2010-10-04T01:35:42Z")
> [@Little\_Nemo](#): > > Anyone who wants to know what might happen with a national debt this size could just do a few minutes worth of research. > > The national debt right now is about 85% of the GDP. That’s not unprecedented. In 1946 the national debt was 117% of the GDP. > > And what happened? We started paying it off. It took a couple of decades of high taxes but there was no national collapse. > > Excessive debt is a problem and it’s something we should be concerned about. But it’s not the end times. Huge differences. We had just come out of a World War and defeated two super powers. The debts that got us to that place weren’t systemic expenditures that couldn’t be cut. Social Security was in its infancy. There was no Medicare, Medicaid, HUD, Department of Education, Homeland Security, arsenal of nukes, etc. ---
**Author:** ![Little\_Nemo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/little_nemo/32/3120_2.png) [@Little\_Nemo](https://boards.straightdope.com/u/Little_Nemo)\ **Post date:** [October 4, 2010, 4:01am UTC](https://boards.straightdope.com/t/what-would-be-the-effect-of-a-us-sovereign-debt-crisis/555017/24 "2010-10-04T04:01:20Z")
> [@jtgain](#): > > Huge differences. We had just come out of a World War and defeated two super powers. The debts that got us to that place weren’t systemic expenditures that couldn’t be cut. Social Security was in its infancy. There was no Medicare, Medicaid, HUD, Department of Education, Homeland Security, arsenal of nukes, etc. Cutting spending is not an option - we’ve already spent the money. If we want to pay off what we owe, we need to collect extra income. The top marginal income tax rate is currently 35%. As recently as 1986 it was 50%. Throughout the seventies it was 70%. Back in the fifties it was 91%. So the country has survived higher taxes. But apparently this paragraph is invisible to some people. “We’re facing an enormous amount of debt. Can we slash spending?” “No, it’s a debt. We’ve already spent the money. We need to raise taxes.” “Maybe we can cover it through economic growth.” “No, it’s unlikely the economy will grow very much and it certainly won’t grow at that level. We need to raise taxes.” “How bad would the consequences be if we defaulted?” “Disasterous. We’d be better off raising taxes.” “Maybe a limited nuclear war with China would help.” “I doubt it. I think we should consider the possibility of raising taxes.” “So you’re saying there’s no hope and we’re all doomed. I guess I’ll go home and take poison so my death will be quick.” “Honestly? That’s probably a good idea. And then after you’re dead, we’ll tax your estate.” ---
**Author:** ![dzero](https://avatars.discourse-cdn.com/v4/letter/d/5f9b8f/32.png) [@dzero](https://boards.straightdope.com/u/dzero)\ **Post date:** [October 4, 2010, 5:12am UTC](https://boards.straightdope.com/t/what-would-be-the-effect-of-a-us-sovereign-debt-crisis/555017/25 "2010-10-04T05:12:07Z")
I didn’t see anyone mention the fact that the US dollar is the world’s primary reserve currency. As long as that is the case, it is unlikely that you would have a collapse in the dollar and dramatic increase in the cost of funds. The real issue is borrowing costs. As long as those remain relatively low, continued financing of the national debt won’t be an issue. I think what really scares people is the tremendous rate at which the deficit and therefore national debt has grown in the past couple of years. Obviously that can’t continue - at least not indefinitely. But my impression is that much of that growth has come about either directly or indirectly as a result of the financial crisis. The bailout of the banks alone was close to $1T IIRC. However there is a good chance that all of that money, even the portion that went to AIG, will be paid back in full - and possibly even with interest. Even now growth for this year is predicted to be in the 2-3% range I think. Given the fact that this is a lackadaisical recovery at best, that’s not too bad. As confidence in the economy grows, those numbers should grow too. I think that both parties realize that continued increases in spending aren’t an option. As long as the growth in spending is restrained, I can’t imagine there being a US sovereign debt crisis for the foreseeable future. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [October 4, 2010, 2:09pm UTC](https://boards.straightdope.com/t/what-would-be-the-effect-of-a-us-sovereign-debt-crisis/555017/26 "2010-10-04T14:09:52Z")
> [@athelas](#): > > 1. No sovereign debt crisis if we leave everything the way it is. (Unlikely) Why? [Previous page](https://boards.straightdope.com/t/what-would-be-the-effect-of-a-us-sovereign-debt-crisis/555017.md?page=1)