The world truly would change dramatically. I know this sounds a little alarmist, but wholesale default on all US government debt is truly an end-of-the-world-as-we-know-it scale event. ![]() It would be my guess that the US government as we know it would not continue. This would be problematic since the depression and economic turmoil would require expanding the deficit. The government would never again be able to borrow at low rates, it may not be able to borrow to fund its usual deficit. Irreparable harm to confidence in the US government. I would not be surprised if starvation and loss of social order ensued. These people would reduce their spending and default on some loans, causing amplified effects on interest rates and economic activity. Firms would be unable to borrow and have to forgo projects and lay people off. Cash maybe? They would pull money out of both safe and risky investments, driving down both stock and bond prices. A failure of the safest investment (treasuries) would cause utter loss of confidence in all investments and investors wouldn't know where to put money. The Russian default had consequences because it caused investors to dump risky investments in favor of safe ones. The loss of confidence in financial institutions and markets would be incomparably greater.ĭrastic increases in all interest rates and a sharp decline in all stock prices. We witnessed a great deal of hobbling of financial institutions and markets when a few CDS's and mortgage-backed securities failed. Treasury securities are used as currency and margin in many large and important financial transactions. Total freezing of most important financial transactions and many markets. There would be ripple effects as other institutions linked to them (or who they owe money to) faced an uncertain future. Pension funds, banks, central banks, possibly whole governments would immediately fail. On the other hand, treasury securities are held by institutions that are not well-equipped to bear risk. LTCM was a hedge fund: a type of institution the is specifically expected to have significant failure risk. Massive failure of important financial institutions all across the world. My guesses, based on a complete default (no money recovered) on all treasury securities: This makes it hard to make guesses about all the ramifications. There are no remotely similar events to compare it to. The Russian default was an extraordinarily insignificant event compared with a current-day US default on all treasury securities. World Reserve Currency aside, is the Russian default a fair comparison? What different things might we expect if it were the US to default in the coming years? ![]() Also it destroyed the business model of Long Term Capital Management, an investment fund headed by a team of nobel-prize winning economists and mathematicians. That had global repercussions to North and South America and beyond. One of the only examples that came to mind is when Russia defaulted in 1998. So I would like to invite speculation on the consequences if the US one day defaulted on its debt.Ī country going bankrupt is hardly a novel event, but few countries of the wealth and influence of the US are can be found in historical precedent. All of that does make sense, but I'm thinking there might be more to the story. ![]() The US, has the benefit of World Reserve Currency status. American wealth and stability in many forms would be in turmoil.As has been widely discussed already, the situation in Greece is considered more serious than in the US, as they have dollar-denominated debt and can only print Greek currency. credit rating downgrades can tank stock markets too. Unlike a government shutdown that impacts only non-essential programs, the impacts of a U.S. Payments on student loans, tax returns, and government facilities would shut down. Also, any citizen receiving or set to receive Social Security, Medicare, and Medicaid benefits would lose those programs entirely. Inflation would hit hard and fast.Īny government employee would be out of luck for their paychecks. import prices would rise through the roof, which would make it extremely expensive to live in the country. Meanwhile, investors would hop on other world currencies like the euro or yen. dollar would lose its place in the list of global world currencies. It would cost businesses, governments, and loan recipients of all kinds a lot more to borrow money. debt default could shift this far into the other direction. Currently, the federal interest rate is extremely low while the economy recovers from the COVID-19 pandemic. If the government were to default, tough consequences would ripple out on a global scale: deficit often feels like an arbitrary thing considering it's always rising.
0 Comments
Leave a Reply. |