General Question

Tobotron's avatar

What would happen if we just defaulted on our debt?

Asked by Tobotron (1313points) June 8th, 2010

So what would happen if we (your country) defaulted on its national debt all at the same time?

I know this would mess up international investments where some one else owns someone else’s debt but would the world really stop overnight if we did?!

Observing members: 0 Composing members: 0

21 Answers

grumpyfish's avatar

The panic would cause far more economic harm than the actual defaults (much national debt is forgiven in lieu of economic support in times of crisis).

As for the “real” effects, I hope an economist who knows more will wander by =)

josie's avatar

So much wealth would suddenly disappear that marketable human activities would stop. The list is too long to write, but among these would be small and large scale manufacturing and farming as land and factories and offices fell into forclosure. Government revenues from the taxation of production would drop, resulting in diminishment of police fire and other safety services. On a national scale, military spending would stop, exposing overseas interests to being over run and perhaps even leaving the borders exposed. Government payroll, and payouts like social security and medicare would stop which would leave countless people economically stranded and essentially stop consumption. An attempt would be made in the short term to make up for the loss by printing money, but since the money would have no tangible representation in wealth, it would be essentially worthless and you would see people rolling wheelbarrows full of dollar bills in order to by a pack of gum. The next generations would work all of their lives to recreate the wealth that disappeared by the default. Etc.

PandoraBoxx's avatar

Devaluation of the world monetary systems, no credit on which to conduct business, grinding halt to commerce, global unemployment. If you look at the economies of most of the countries in Africa, you get a good idea of what it would be like.

Tobotron's avatar

not a good picture then :S maybe the only reason Africa managed to slightly get away with in when there national debt was wiped was because so many African’s arn’t as reliant as we are on the monetary system. Eg. either self sufficient from the earth or on aid handouts?!

josie's avatar

@Tobotron That is correct. It would cause the end of a “division of labor” organization and make every individual their own factory, if you will. This limits the amount of wealth that can be produced per person per unit of time, this decreasing over all wealth in the market place. But your question implies the US is defaulting, and we are the one giving most of the handouts. So figure the handouts would disappear as well.

CMaz's avatar

We have worked ourselves into a “Damned If you Do, Damned If you Don’t” situation.

envidula61's avatar

One might think that ownership of much of the nation’s infrastructure might change. What does your Federal Government own? The military and much of the health care system and many housing programs.

Well, it doesn’t make sense to say that ownership of those things will change. No country would allow another to “own” it’s military. That just doesn’t make sense.

What would most likely happen is that the debt would be restructured, and the world would suffer a long recession. Oh hey! Look! Greece!

If the US defaulted (and it never could because your mortgage holders would change things long before that could happen), then all your social programs would be drastically cut (as we are seeing over in Europe right now). Medicaid would bite the dust. Medicare and Social Security would probably cut benefits in half. No more housing programs.

Of course these changes would ripple across society, and you would probably see something more like a depression than a recession. And that depression would ripple around the world, affecting all the rest of us. We’d see homeless people all over the place. Tent cities even in the US.

It’s all kind of stupid, really. It’s not as if there are fewer people working or less infrastructure. No. What will have disappeared is confidence. Humanity is dependent on emotional and psychological justifications for much of our behavior. It was silliness to invest in tulips. It was silliness to value tulips. It was silliness to think that the tulip crash actually mattered. But it did. Because we thought it should.

CMaz's avatar

“all your social programs would be drastically cut”

So true. Us being slaves to the lender.

bolwerk's avatar

It probably wouldn’t take anywhere near global default of national debt to create a huge, huge problem. Not that I think it’s necessarily likely to happen soon, but just hypothetically a state like California defaulting would probably create huge, global upheavals. Imagine all the bonds that would stop being paid and the multiplier effect of that money – and the resulting investment panic.

It may not even be quite as big as the crash in ‘08 with banks and the auto industry going belly up, but political will do something about it might be lacking, especially after all the bailouts we’ve already had and considering California (1) isn’t that popular with many in Washington and (2) has, unlike private industries in a death spiral, the political power to raise its own revenue, even if it’s politically handicapped. Heck, the fear of New York City defaulting in the 1970s was enough to cause political fear of national repercussions. (NYC was bailed out by the state, so sadly we don’t really have an instructive case to go on.)

tedd's avatar

Our debt honestly isn’t that bad.

When they founded the country, the founding fathers INTENDED to have a national debt. Believe it or not, SOME national debt will actually help your economy. This is because to make your national debt you sell government bonds. Those bonds have interest (though usually at low rates). So if you invest say $50 into government bonds today, in 20 years they may be worth $60 or something like that. This helps the economy because that interest is money made by the people, and in the mean time the government has the money to use. Currently, the biggest holder of US debt (between 50 and 60 %) is actually US citizens. The next biggest holder is the combination of Europe, followed by China, and Japan not far off there. (The commotion about China is that over the last decade they’ve been the biggest buyer, but around half of our debt is actually from the Reagen era, and China wasn’t the buyer).

The problem is that a healthy national debt is somewhere around 75% of your annual GDP. Currently ours is about to hit 100% of our annual GDP. Now this isn’t the end of the world, its been here and far worse before (during WW2 and the Civil War it exceeded 150% GDP). But it needs to be toned down.

The problem, believe it or not, began with Reagen. He cut the highest tax bracket from around 70%, to around 30% (fun side note, during the 50s under Truman and Eisenhower the US saw its biggest economic boom ever, and the highest tax bracket was around 90%). The deficit skyrocketed under Reagen, and made the debt go up by huge amounts. Clinton managed to bring the deficit down (his last year in office it was only 18 billion dollars, whilst Bush handed Obama a 1.2 trillion dollar deficit). But NO president or congress since Reagen has been willing to either cut social programs to match the tax income, or increase the taxes on the rich to where they should be. Heck Bush’s huge tax cuts, came right out of the pockets of China, it was a 1.5 trillion dollar (combined) addition to the national deficit. So basically enjoy the tax cut that your grandchildren will be paying for.

envidula61's avatar

@tedd Excellent way to put this in context! GA!

bolwerk's avatar

To add to @tedd‘s point, debt is a stabilizing force in capitalist society. The biggest problem with the debt crisis two years ago was that small businesses were threatened with being deprived of easy access to affordable short-term credit.

The obvious problem with debt is when you have too much of it. The U.S., at least with its current tax code, is spending hundreds of billions$/year on debt service. Even if we can sustain it, it’s a big waste, especially given that it went to cover one-time operating expenses – we did little to invest in things like infrastructure that might have helped future generations.

Tobotron's avatar

Bush actually racked up more debt than every single president before him combined! And I doubt Blair and Brown in the UK did much better…

All for the Robin Hood Tax, internationally could really help…UK is looking to incur a levy on banks under the current government even if it has to be the first country in the domino stack to do so.

Spain currently striking over a 5% pay cut in public sector, seems people still aren’t accepting the trouble were in, although I agree it shouldn’t only be the public sector that makes sacrifices.

YARNLADY's avatar

Many people don’t even know what National Debt I urge you to read this article before you try talking about defaulting.

Much of the so called ‘debt’ is in the form of savings bonds owned by individual citizens, and other types of government bonds which citizens and companies have invested in. This means we bought them at a low price on the promise that when they mature, they will be worth a higher price. That promise is in the form of a debt now, to be paid off later.

ETpro's avatar

@envidula61 & @tedd Thanks for bringing the afacts to bear in a sea of speculation. I would just add that we are in better position right now than we were in 1945 after all the spending it took to cure the last crash caused by an unregulated Wall Street making huge bets with money they didn’t have; and then fighting the World War the pain of that crash created. The national debt hit 120% of Gross Domestic Product in 1945, and the greatest generation rolled up their sleeves, set the top tax rate at up to 94% on income after the first $200,000, and paid the debt down.

Our debt today is not nearly as bad, but our don’t tax, just spend policy can not be sustained. We must either raise taxes on the top brackets or raise them on everyone and let wealth keep flowing to the top 1% as it has been doing ever since Reagan’s massive tax cust for the wealthy.

Tobotron's avatar

Reagan was just a puppet I doubt he made any decision himself, its an absolute joke he got to power at all…he was without any doubt a tool of the rich cartels to cut the top rate of tax to 30% is laughable when you consider the earning’s of the top 1% of the US population.

What I find amazing is how US spending is so high in the area of private contractors out in the middle east. Blackwater Worldwide for one, all winning contracts because of their friends in high places, costing you tax payers a small fortune and the people running these companies taking such a huge cut its not even imaginable.

There’s no doubt that this all materialized out of one of the most corrupt governments in the world, only there very good at keeping it quiet or just playing just plain stupid when there caught out.

Tobotron's avatar

apparently towards 2006 it was 40 cents in the dollar going on private contractors such as those I mentioned. I imagine when you look at the money spent on the campaign that’s for every dollar of tax paid.

mattbrowne's avatar

Banks would have to declare bankruptcy. People saving money would lose their savings. Whole economies would break down.

YARNLADY's avatar

@mattbrowne In other words business as usual?

ETpro's avatar

@Tobotron Try 28%. In 1988, Reagan cut it to the same rate as the next lower bracket had been paying, and left their tax alone so they were then paying the same rate as billionaires.

mattbrowne's avatar

@YARNLADY – On a larger scale, though.

Answer this question




to answer.

This question is in the General Section. Responses must be helpful and on-topic.

Your answer will be saved while you login or join.

Have a question? Ask Fluther!

What do you know more about?
Knowledge Networking @ Fluther