I know this question has been raised many times before and I’ve read about it quite a few times, but I’m drawing a blank right now. What exactly would happen if the US decided to default on it’s debt?
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They won’t default, but instead will print money to pay it off. Which means hyperinflation, because there is so much new money demanding the goods for sale.
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Just for laughs, let’s discuss the theoretical unlikely possibility that they do default. If they do, they say to everyone, “We owe you the money, but we can’t repay it. Oh well.” Which means no one will ever lend the US money for another hundred years, if ever. So when the gov’t wants to buy anything, they will have to pay in cold hard cash. Where will they get it? One possibility is print money and buy with that, meaning back to hyperinflation, as in 1.
Another is to tax the citizenry till they are bled white. This may be resisted, of course, as in riots. So a diversion will be needed. An enemy will have to be found, war declared, patriotism and sacrifce shouted from the rooftops. We are no longer in sound shape to be able to afford a war, like in 1940. In any case, war or no war, it won’t work for long. Once everyone is taxed so high the first year, there will be nothing to take next year.
Of course, there is the EXTREMELY UNLIKEY POSSIBILITY that they will stop spending, haha. Which means no more welfare, food stamps, social securtiy, medicare, health insurance, nothing. Truth is, this is the very best thing that could happen. People will be hit hard, very hard, but will then slowly dig their way out. Ideally, the govt should stop spending right now anyway, regardless of wether they default or not.
Bah, more like Depressing Dave. I always scratch my head when I think about why in the hell we just won’t stop spending any time soon. Like seriously, is everone but us obliviou to the amount of spending that is going on?
I think that a default would be best, I think it makes it so the full cost of the politicians programs would be felt immediately. (yes they can inflate but this isn’t a long term solution eventually the golden goose is killed) So I think if the US government couldn’t borrow money that would be a good thing.
“why in the hell we just won’t stop spending any time soon. Like seriously, is everone but us obliviou to the amount of spending that is going on?”
The whole world is a victim of something called The Emperor’s New Clothes.
Some scoundrel [Keynes] managed to convince everyone that govt spending is the best thing in the world, the more the better. [Second best is taxation. Third is regulation.] Every TV show, every University, every Nobel Prize winner, every economist, certainly every politician, praises the Emperors New Spending. The little innocent child [this website] points out that all three things have never been of any benefit, quite the opposite. But unlike the fairy tale, nobody listens.
As the latest case in point, there’s this guy.
Notice the title the uploader gave to this video. Amusing.
“Some scoundrel [Keynes] managed to convince everyone that govt spending is the best thing in the world, the more the better. [Second best is taxation. Third is regulation.]”
Alas, if it was all taxes n’ spending and no regulation it would actually work (badly, but it would). The problem is that repealing regulation means making one a lot of enemies among former clients, while lowering taxes makes one a lot of friends. Hence the modern model of high regulation, high spending, medium taxes.
“The little innocent child [this website] points out that all three things have never been of any benefit, quite the opposite.”
Incorrect. Some people have benefitted. The connection people in general never make is that they benefitted at the expense of the rest of the population. Which is why inflation is such a wonderful tool for the government and gold standards such an evil in their view, because the former lets the government pose as a source of wealth to the unaware whereas the latter makes it quite clear where the wealth is coming from to fund the government’s actions.
Liabilities won’t be met and any assets that are tied or derived from these liabilities would also become worthless. I disagree that this is not likely to happen. A Zimbabwe type inflation in the US seems just as unbelievable today as a default on all debt. You should prepare for both. One or the other will occur. You may have some severe inflation first, followed by a default on debt. When you will have 400% inflation in the US, don’t presume to know ahead of time (today) what the next move will likely be in such a scenario.
I think that people tend to not realize that when the US goes down, as the European Union will also, there will be no more bailouts. The bailouts will stop. The US is not Iceland or Greece. There will be nobody left to bail out. The game will be finally over.
Totally agree, xahrx. In the parable, it’s the fraudulent weavers who profit.
Tues. 10/04/27 19:05 EDT
.post #86
[url=Defaulting on debt? - #5 by Smiling_Dave]
[url=http://www.youtube.com/watch?v=sf6Nsc8HvBAQ]
The title Zeldovich gives this video is “James Galbraith pwns Peter Schiff.”
I note that Zeldovich’s channel doesn’t contain a video entitled “Arthur Laffer pwns Peter Schiff.”
It does, however, contain European Central Bank propaganda entitled ECB Inflation Monster Cartoon which, according to Zeldovich, “…is being shown to school kids within the EU.” No doubt, Zeldovich approves.
The guy that posted that video if a complete baffoon. I cannot believe some of those comments.
What’s funny is you can find that exact same video on some libertarian websites where people are proclaiming that the “pwning” is the other way around.
When the US was a creditor to several European countries after World War I, many of the debtor countries settled their debt for pennies on the dollar. For instance, Italy reached a settlement in 1926 where they only owed the US 24 cents on the dollar. (Source: Lords of Finance)
It’s fathomable that something similar could occur, although I wouldn’t plan on it.
As someone who’s stocking up on silver for the coming (hyper)inflation, this is a question I’m very concerned about.
As we all know, there’s only two conclusion for the situation at hand: Hyperinflation or default.
Ok, maybe there’s a third: Ron Paul becomes President and we stop the wars and cut spending thus gradually repay the debt. For the sake of our country, the first (?) experiment in liberty in the history of this world, I hope this happens. I’m doing my part, are you guys as well?
Anyways, what would happen if default happens? More importantly, how would it effect the price of silver (and gold)? I know what will happen during hyperinflation, but default?
Also, can we ONLY default the debt to THE FEDERAL RESERVE???
STIFF THE FED! STIFF THE FED!!!
then…
END THE FED!!!
Good question. My humble analysis:
- Looking over what I wrote in earlier posts, maybe I made a boo boo. Maybe if there is a default nothing will happen out of the ordinary. Anyone, here and abroad, who has US bonds will lose a lot of money, but the world might shrug it off after a year or two. Or the US may offer higher interest rates for a while, the message being “You might lose your principal later, but at least you are getting 7% interest right now.” And who knows? People may buy into it. But that interest has to be paid. Where is the money to do that coming from?
On the other hand, even now as we speak, the new bonds are being bought up by the Fed. So who needs the rest of the world? The US govt has its printing press. So interest rates may stay low; the Fed doesn’t need high interest rates. But where does the Fed get the money to buy the bonds?
In other words, either way, defaulting won’t give the govt new money, will it? For that they have to keep printing the stuff, just like now. Meaning gold and silver prices will not suffer, they will keep going up, for the exact same reason they are going up now, debasement of the dollar.
- But say the worst possible case happens for gold and silver. Debt default, no new money printed ever again. The value of the dollar will suffer no more. Gold and silver won’t go up, but will they go down?
Only if demand for them decreases. Only if the people who own it now decide to sell their gold, because there is nice money to be made elsewhere. Meaning the govt is borrowing money at a high rate of interest, like in the Reagan years. And assuming they won’t print to pay that interest, and won’t raise taxes, they can’t do that. Where will they get the money to pay high interest? Of course, they could try a Ponzi scheme, use some of the borrowed money to pay the interest, and borrow more the next year. That can’t last long; the printing will start all over again after a while. Back to case 1.
So with this worst case scenario the metal prices will drop for a few years, then, like the pheonix, will rise up from the ashes.
- Oh, I forgot. Even worse scenario. The govt defaults, and also cuts spending drastically, so much so that low taxes are enough to feed their greed. Goodbye wars, social security, medicaire. With no need to print more money, they never do it again. In addition, they burn the 70,000 pages of regulations, making it possible to earn a profit running a business. No need to hang onto gold then, hey? Better to sell it and make money elsewhere.
In which case all those gold and silver bugs made a big mistake, and will have to suffer for it. They misunderstood human psychology, not realizing that when push comes to shove, the politicians have the interests of the people at heart.
What I think:
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The US would default on some of the debt.
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Anything denominated in US dollars would crash; however, this would be a short-term move.
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Ultimately, the government has hundrends of trillions of dollar of obligations that it can’t (politically) default on, so, the Fed will print the money to cover those obligations; thus, rising asset prices again.
What do you all think?
This is where “understanding the market” really comes in handy. Many of the Keynesian financial types I’ve talked to say that if the Fed stopped printing money and the markets collapsed, then they would rush into gold for safety. So, if this is the general consesus of the market, there could actually be a rush into gold if the US defaulted. Whether the nominal price of gold would goe up or stay the same I find irrelevant because, relative to other assets, it’s prce would go up.
It would basically be so bad that there’s no way to predict exactly what in god’s name would happen. There would be suffering, and a lot of it.