Personally, I think it’s more likely than not that this will happen in our lifetimes. The debt load gets greater and greater, and the problem is that though the public’s concern about it is growing, as the debt itself grows, the measures that would be required to deal with it grow more drastic. There’s generally support for doing less than would be required, but not enough support for doing what would be required. I don’t see this changing in the future as the debt grows and the necessary measures become ever more drastic.
As I see it, what’s most likely to happen is that people and politicians of various ideologies will continue to disagree about what needs to be done, and a crucial uneducated constitutuancy opposes all measures, until we reach a crisis point, i.e. the point at which the choice becomes super-drastic measures or default. At that point voices will be raised pointing out that most of the debtholders knew they were accepting the risk when they lent the money, and that’s just part of the deal when you lend money, and plus they’re mostly a bunch of fat cat rich guys and foreign governments anyway, and meanwhile people are struggling to put food on the table and you can’t cut their benefits or increase their taxes to the level that would be required to meaningfully impact the problem.
It is about 10 times more likely that we’d devaluate the dollar so we can repay the debt with worthless inflated dollars than that we’d default on the debt.
You can’t devaluate only the dollars that you use to pay back the debt. You’d be devaluing all other dollars as well. Anyone who had fixed incomes or non-inflation indexed cash holdings would be crushed by the type of devaluation necessary to pay back the debt. I don’t think that’s realistic politically.
Of course inflating the dollar affects all dollars. But defaulting on the debt means you can’t borrow anything anymore. If the debt is so bad that default is being spoken of, we’ll still need to keep borrowing. The only alternative to borrowing is raising taxes and cutting spending, which is just crazy talk. So we’ll need to keep borrowing and spending, which means inflation. Inflation helps debtors and punishes creditors. Since the US government would be one of those debtors, it’s a pretty tempting option.
This certainly isn’t accurate from a historical perspective. The US public debt as a percentage of GDPis not on a one way climb, and was falling in the late 90’s and early 00’s. I see no reason to conclude that, just because it is rising now, it will continue to rise forever.
Agreed. We actually paid down the debt a little bit around 2000. I don’t even think it would take anything extreme to get the budget back in balance:
Some moderate increase in the tax rates (back to Clinton-era levels?)
Moderate changes to social security (remove the limit, add some means testing – granted, that turns it into more of a welfare program than it currently is)
Moderate reduction in defense spending
With a growing economy, the above may be enough. If it doesn’t, then you get into more “radical” solutions:
Something like single payer to get health care costs under control
A moderate VAT
When I say “radical” I mean “less radical than most of Western Europe.” None of the above is even remotely as crazy as sovereign default. In any case, all of Europe, except possibly Germany, is a greater default risk than the US, so I wonder if currency in general would any meaning by the time the US is ready to go.
I don’t think the US will ever default on its debt. It would be more politically feasible to make radical cuts to entitlement programs than wreck every sector of the economy.
As a politician, what situation would you rather have: all the Social Security recipients mad at you, or every single American mad at you?
As long as the dollar remains the defacto currency I don’t even see the US losing it’s AAA credit rating, let alone defaulting on it’s debt (which, as others have said, is pretty much inconceivable).
Even assuming that we don’t have another cycle of economic boom, my guess is that, again as others have said, the worst case scenario is that we are forced (instead of it being voluntary) to make real, substantial cuts to the military and our social spending policies and cut back on many non-essential programs. THAT I can see happening in our lifetimes…hell, I could see that happening in the next 10 years, depending on how this recession thingy plays out.
Individuals and institutions continue to borrow money after debt defaults, and countries have done the same. Of course, it would cost a lot more as well. OTOH, the need for borrowing would be drastically reduced if the government stopped paying interest on the old debt. (And the reduction would be a lot more drastic at a time of higher interest rates.)
There are ups and downs but the long term trend is clearly up. I believe the debt is currently at an all time high relative to GDP (& we are not currently in the aftermath of a major war, as we were during the previous all time high.)
I think you may have it backwards. The dollar is the default currency because it’s perceived to be stable. If we reach the point at which the government is thinking of defaulting (or even of massive inflation) it will cease to be the default currency even prior to an actual default.
There are intended to spur some inflation but not anything remotely close to the levels that would pay down the debt. They’re supposed to add a point or two in a low inflation time. Not to spur massive inflation that would materially impact a debt crisis.
The thing is that if only the Chinese would not buy our bonds unless they were denominated in Euro, that would signal a massive loss of confidence in the USD. The USD would fall against the Euro and everything else. The real incomes of Americans would fall, and we would be forced to consume less imported stuff. Employment would rise as our real wages fell.
The only people who would hate this outcome more than the Americans whose real income gets hammered are the rest of the world. The idea of a US that imports less and exports more is pretty much China and the EUs nightmare scenario, so they aren’t going to be the ones who precipitate it. So we are stuck in this dance of death, so long as no one really goes nuts with the quantitative easing, AKA printing money.
Even if the oil producers refuse to accept dollars, it will make very little difference. The Chinese will be happy to exchange our dollars for euros, so that we can pay the Chinese. Because they have a huge vested interest in keeping us borrowing and shopping.
All these things are true under the current scenario, with US debt considered the safest in the world and everyone thinking somehow or other it will all be repaid. If people start to think maybe it won’t be repaid, that would all change.
The credit card companies encourage people to irresponsibly spend as much as they can, but if they think you’re going BK they would stop too.
Why can’t he, and others who think like him, stand against everyone else on the assumption the results (whatever they think they are) can be blamed on the White House?
Of course, this may not be likely either; I’m just saying that such political considerations aren’t on every politician’s radar in the way you say.
