General Question

Nullo's avatar

What would be the fallout of the U.S. defaulting on its inter-agency loans?

Asked by Nullo (21916points) October 31st, 2012

As I understand it, most of the national debt is money that one internal agency owes another within the same government.
Why hasn’t anybody just written all of that off? It would look great in any re-election campagin.

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6 Answers

wundayatta's avatar

What are you talking about? If the government doesn’t pay back the debt it owes to Social Security, where will the money to pay for social security benefits come from? And there is no need to default. We are not in danger of not paying back our debts. What we need is for the economy to move faster and inflation to increase, and then it will be easy to back back these debts.

wonderingwhy's avatar

It would look bad to the credit rating agencies because it suggests we can’t pay our debts and as a result we’d see any future borrowing costs go through the roof. Also it would probably destabilize the world economy to some extent as US debt is still considered solid and our economy makes up such a large portion of the world economy. We’d have to make dramatic cuts in spending to prevent re-accumulating debt (at much higher interest rates) which would have all sorts of negatives. And as @wundayatta suggests a lot of that money is owed to us, so that investment and its return suddenly disappearing would have an even larger effect at home (which of course would then reverberate around the world because of our economy suddenly deflating). That’s not to say it couldn’t be done, but it’s not the kind of thing one does (or at least should do) as a campaign (re)election stunt.

tedd's avatar

It would be bad. Many of those agencies own part of our debt as part of their own long term investments, be they for retirement or what have you. As pointed out, how would our SS handle it if suddenly they weren’t getting all the money owed them?

Also as pointed out, it would do heavy damage to our credit rating. Even if we just “forgave” the loans as they were to ourselves, the credit agencies would not look kindly upon it.

Nullo's avatar

Thanks! I confess that I do not have enough experience with finance to be terribly good at it.

@wundayatta I am, of course, asking about the fallout.

Espiritus_Corvus's avatar

I think it is hillarious that since Iceland defaulted and told the international banks to go to hell a couple of years ago, they’ve been doing very well and the same banks are willing to loan them money again. I suggest Greece do the same: go back to the Drachma and tell the Germans and their banks to go fuck themselves. Then Spain. Who knows? We might be better off as well, eventually.

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