Armageddon if USA Can‘t Pay its Debt?

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kiwi_canuck's picture
kiwi_canuck
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Armageddon if USA Can‘t Pay its Debt?

That is the implication.  However, in practice doesn't this old adage apply?  If you owe the bank $100,000 and you can’t pay - you have a problem.  If you owe the bank $100,000,000,000 and you can’t pay - the bank has a problem. <!--break-->  

Take US foreign debt to China for example: China has a big problem. USA, its biggest customer, has drastically cut its buying.  Chinese factories are closing and millions are unemployed.  Will China call in its debt and risk losing the lot?  I don’t think so.   It is in their interest to nurse the US (or should I say the West) through the crisis.

 

When companies get into cash flow trouble they are able to accept a compromise with their creditors.  Effectively they freeze their debt with creditors, pay no interest and repay principle in a trickle as the company can afford.  The other option is to liquidate the company and get what money you can, often cents on the dollar or nothing.  I think foreign creditors will compromise.  Basically it will be Chapter 11 bankruptcy for the whole country.   I  expect foreigners will not be keen to loan more money to the USA, but they will still be keen to trade albeit under strict conditions to ensure payment.

 

Lateral Thought:  Golden Opportunity to Cancel Domestic Goverment Debt?

As the Crash Course explains the Fed creates money by exchanging cash for Treasury Bonds.   The US governemt debt is therefore owed to the Fed, and the Fed is owned by a small group of banks.  If the government buys one of these banks for a song then suddenly the goverment will owe some part of its debt to itself.  Could this debt be cancelled?

 

A Perspective on Debt Size

How big is the US debt compared to its income?  10 Trillion vs. 13 Trillion?  Is this such a big deal?  Individuals manage to pay off a higher mortgage debt compared to their income, so why not a country?  All is not lost!  (Yes, debt  is not the only problem.)

mainecooncat's picture
mainecooncat
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Re: Armageddon if USA Can‘t Pay its Debt?

I  think a critical aspect of the debt issue you raise is the purchasing of new debt. Many of the things you say are true, but, for example, a homeowner who has a mortgage that's several times their income doesn't keep taking out new loans of whatever type every year. Assuming that they don't have an explosion of income, they at some point need to reach a ceiling of some reasonable figure that will allow them to pay off that debt within 15, 30, or 40 years.

In your example of a small debt being defaulted on being the borrower's problem but a large debt being defaulted on being the lender's problem, China may be hurt more (what you're implying) than the US. But then that hurt cycles back to the US when China can't buy new debt. So perhaps in the end the pain balances out or this old adage is nullified?

Another issue here is the so-called real economy, which is going to be the biggest victim of the country's long-term insolvency. In general, much of the fabled 20-year bull run, which has now come to an end, was really a profit-taking orgy by a tiny sliver of the population. It should be alarming to people of good conscience that during this Wall Street explosion the reverse was true for the vast majority of Americans. Real wages have been flat for 25 years, more people don't have health insurance or have coverage that's more or less worthless, household debt is at an all-time high, more people than ever are on food stamps, more children than ever live in poverty, etc. If this is the result of "good times" on Wall Street, what will the bad times look like for the average American?

So the incestuous and nebulous networks of international banking and finance may be able to work things out for themselves but the real economy can only suffer.

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dbrenaissance
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Re: Armageddon if USA Can‘t Pay its Debt?

I think the question of military action is legitimate.  China has a much more severe problem than the US.  They are concentrating a huge population into their cities.  Their authoritative regime fears what will happen if the citizenry become disenchanted with the government. They require growth of something like 9% per year just to keep their economy going.  With the slowdown in the US economy, their plan is really in trouble, and massive layoffs have already begun.  What will they do with the unemployed?  My guess is that they will seek to blunt the impact of the unemployed by pushing them into the military.  In order to turn people's attention from domestic troubles, it's useful to have an external enemy.

The US is no different.  If the domestic issues aren't resolved quickly, it will be politically tempting to ratchet up military spending in a big, big way, to pull us out of the doldrums.  Nothing does this better than a war. There are two ways to look at the Iraq war, it's too big, or it's too small.  It has been big enough to help ruin the economy, but we, as a nation, have not been committed enough (in spite of 9/11) to adopt the level of measures that we did in WWII.  Politicians will recall that it was WWII that finally got us out of the Depression. Hopefully they won't seek the same solution this time.

The nexus of economic, energy and environmental issues that Chris paints in the crash course will result in unprecedented competitive forces being unleashed in the world.  These rivalries will have the potential to make or break national economies and destroy governments.  These governments won't lay down quietly.  There will be lots of conflicts.  Some will escalate into shooting wars. Central banks have historically encouraged large wars by lending to both sides and enriching themselves and their powerful friends, so there are many incentives for nations to evade domestic troubles by going to war.

The fact that the US is a critical market, will not deter war.  Japan attacked the US, it's main supplier of raw materials because they saw it as an impediment to their national interest. With the role that the US has played in this debacle, there will be plenty of reasons to blame it for the worldwide troubles.  I own a rental property. When my renters don't pay their rent, it doesn't endear them to me and even though they are the key to my prosperity.  It makes me angry.  If my deadbeat renters were the only game in town, and arrogant to boot, I would grow to resent them pretty quickly.

I think the next 20 years will be different than the last.  But I think that war is a very likely part of that difference.

rrabbit's picture
rrabbit
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Re: Armageddon if USA Can‘t Pay its Debt?

The sheer size of the US economy makes it impossible to predict when or if the US will become bancrupt or insolvent. For example, small Belgium's "official" national debt reached 121% of the Belgium GDP at the end of the 1980s, and yet Belgium survived.

This will inevitably be painful, and US citizens should expect some combination of

o inflation

o economic recession

o higher taxes

o reduced pensions

o having to work until age 70 or even 75

o shortage of some essentials

o possibly riots and other violence

The longer and the faster the debt is piled up, the worse it will be.

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