What would happen if the US defaulted on its foreign owned debt?
We were debating this at coffee break today.
Some said nothing would happen, others said the whole world economy would collapse and we would enter a world wide depression so severe that the Great Depression of the 30s would be forgotten.
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Bad stuff, in between those two extremes you mention. There’s a whole chapter in this book which you might be interested in, if you ponder questions like this with any kind of regularity.
Yep, what @laureth said…
It wouldn’t so much be the entire world economy collapsing as it would a major re-balancing of the global political scene.
It’s about confidence. We saw the ripples that went through the global economy when Greece and Spain’s economies faltered… I shudder to think the results of loss in confidence in the US economy—or rather, increased loss in confidence—if we defaulted on our loans.
You need to prepare for some serious inflation, regardless.
I’ll take a stab at this. If the US defaulted on loans, they would no longer be able to sell bonds and T-bills since no one would trust them. That would impair/stop the US’ ability to borrow money. Since we are running huge deficits, the US wouldn’t be able to maintain it’s current budget. So all kinds of services and departments would be underfunded or ended. Social Security and Medicare would be hurt, just about anything. It would hurt so much more since the gov’t borrows around 40 cents of every dollar it spends. So, basically, the US would need to end 40% of itself.
The other aspect is how the Fed would lose control over monetary policy. The Fed buys and sells T-bills to control the money supply. This is how the Fed combats inflation and deflation. If the Fed can no longer buy T-bills, the money supply would not be able to increase during times of inflation. So instead of being able to pump more money into the economy (so there would be more money chasing the same goods, keeping inflation down), the inflation rate would be out of control.
I’m not an economist, so please anyone correct any mistakes I made in my thinking.
My position is that we would fall into the same pit Germany did between WWI and WWII. If it does happen, I hope we make better choices coming out of it than Germany did in 1932.
It would not be the end of the world, but it would hurt a lot of people before we recovered from defaulting.
Insolvency proceedings. This happened to Iceland. Check out what happened there.
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