I think it’s entirely possible that the large exporting nations will no longer accept U.S. currency. It won’t be something that happens overnight but, the situation is already brewing for a changeover to a new reserve currency.
Is this acceptable? Well, there won’t be much we could say about it short of launching a new world war. This is the inevitable path of mixing Mercantilism and subsidization across industries with an ever-inflating national debt and money supply.
No, they probably would not do anything about it, militarily. But, who would then lend the U.S. government money? Nobody! Given that something like 80% of government spending is financed through borrowing, the government would have to cut 80% of its spending or print money, and then the cat would definitely be out of the bag, as hyper-inflation hit.
Wouldn’t that actually be hyper deflationary? What am I missing?
Couldn’t the government sell all of it’s assets like roads, buildings, police cars and such? Debt could become a road to panarchy.
It wouldn’t necessarily be deflationary, unless banks were allowed to fail and FDIC didn’t cover people’s lost deposits, for example. The more likely scenario, though, is that the Fed would continue to print money and keep interest rates low.
I know it will happen. That’s the beauty of AE. We understand the outcome of pursuing one choice or another. We’re not anti-state and pro-market only because we don’t like politicians, we understand that the economic system of socialism has to fail in the long run, because politically managed money has no incentives to be stable. Every great state collapsed financially, and so to it will be with the US.
What is the alternative? Attack China and force them to keep making toys and electronic goods for everyday low prices?
That’s exactly what I was thinking. It’s inevitable. Even just a rudimentary understanding of AE leads to that conclusion. The police state/military-industrial complex/[add next alex jones apocalyptic scenario here] will all collapse or at least be drastically reduced once the inevitable crash occurs.
It’s one of the few certainties that help me sleep at night. Fuck statism.
I don’t understand, how would printing massive amounts of money result in hyper deflation?
People panic and stop spending. In fact, they might take to hoarding their money. That would remove liquidity from the market faster than it could be replaced. Look at the hoarding the banks are doing with their new funds, is it so difficult to imagine a similar scenario in the event of a sovereign default but at an individual level?
Don’t people need to buy food, clothing, furniture, cars, homes, fuel, electricity, appliances, etc., etc.? If so, why would they stop buying things they need and want? I am still confused.
They are not hoarding. They are lending money to the government.
I am still confused about your line of reasoning.
If the government defaults on its debts, then it still has lots of things to pay for. To pay for them, the government would probably just start printing money. This would result in an increase in the supply of currency, which means it takes more dollars to buy the same thing.
I dunno, something seems off here, I just can’t put my finger on it.
Or they make a rational decision in adverse economic conditions to save and recapitalize, until prices adjust and become more stable, when they can get back to making sound economic decisions.
Hoarding is keynesian speak. We call it saving here. Hoarding has negative connotations, and economics is a value free science.
A debt riddled economy might need liquidity to be reduced. That is the whole point of having a recession. To reduce liquidity, and remove everyone who cannot pay their debts or operate their firms without artificially induced credit. In other words, get rid of all of the businesses which are unprofitable or borderline unprofitable, shifting the resources in capital goods and labour to the firms who have shown they have a successful product/service and management model.
I don’t understand this.
None of this means that there is or would be deflation, though. People who “hoard” their money still have the ability to spend it, right?
Sure. But if they’re spending it, they’re not hoarding it. Sure, we might see inflation in necessities. But we might also see deflation in asset prices. I don’t know, I’m no economics expert, but it just seems like there would be a serious psychological reaction to a sovereign default, no matter what form it takes. That psychological reaction seems most likely to be fear, in my mind. That’s all I’m saying here.
Can’t everything be considered a “necessity”?
Here is the thing. If today we have 1 trillion dollars in the world, and tomorrow the government printed another 1 trillion, doubling it to 2 trillion dollars, would you not expect all wages and prices to double, eventually, since now twice as many dollars are chasing the same amount of goods and services?
Isn’t the problem with this that, technically, if you only make a partial re-payment–aren’t you still defaulting? Perhaps I misunderstand the term’s specific meaning, but I’d imagine that if you have a loan payment due and you only pay 50% of it, you’ve still defaulted on the loan.
Of course, if the gov prints the money to “repay” the loans, they’ll probably get away with it (as opposed to anyone else making a partial payment).
I mean I guess everyone could be considered a necessity, but for the purpose of clarity, I think we could try to define necessities in terms of the goods and services that people require for base level of survival. That’s probably a lousy definition, but we could probably come up with a better one.
Also, as I understand it, inflation (rising prices) would only occur with the goods and services that were in high demand. So the question is not just “is the money supply growing?” but also “where is it being spent?”
So not all wages would double and not all prices would double. Just the wages and prices where the money was changing hands the fastest. Or, to use a nice economic term, wherever the velocity of money was the highest. Isn’t that consistent with economic theory?
Yes, someone else already made this point (a good one). However, someone else made an interesting point that the agreement was to be paid back a certain number of dollars, not a certain number of dollars worth a certain amount. As such, it really would not be a default, if the government prints money to pay of its debts.
Why? Again, the only variable that changed was that the currency supply was doubled. I mean are you saying if tomorrow you received a million dollars, the only things you would go buy would be lots of new products that are on the market (if you are thinking of things with the highest demand)? You would not buy a new home, or a new car, or go to a fancy restaurant, or go on a nice vacation? Or when you say high in demand, are you talking about “needs”? If so, does that mean you would just buy a cheap car, a cheap house, lots of cheap food, etc., etc., just so you can have your basic demands met?
If the only variable that changed was the number of dollars doubled, then eventually, yes all wages and prices would double. That is the only result inflation can really have.
If this is true, why haven’t we seen aggregate (or whatever word you want to use) prices increase at the same rate that the money supply has? What’s not happening here?