should USA default?

[tuhoe]

should USA default on its 14trillion debt? USA is the worlds #1 economy and if it defaulted it would cause a global crisis,but if it defaulted it could then rebuild its economy.Would its citizens support a sovereign default and the hardship that would follow? 2 examples i know of is Argentina which defaulted,kicked the IMF out and did what was in its best interest for its own people,its now a strong growing economy .Iceland was ridiculed during the 2008 credit crunch,its currency crashed and unemployment rose,it also chose to look after its citizens first and left foreign investors out of pocket.Stability has returned and while it is still recovering economically its not the basket case it was 4yrs ago,I'm no economic expert just an interest party,did someone say party? beer and chips for everyone

[Petalumadom]

While you note it would cause a global crisis--I don't think you quite understand the scope and horror of what would happen.

The US Economy is so interconnected and US Treasuries in particular are considered the "safest" assets in the world and are commonly used in finance as the "risk free rate" of return. The repercussions of such a move are far too disastrous and horrible to go over in any reasonable time span (and text space).

The cases you pointed out are important, but pretty different cases.

It is worth noting that Argentina in the early 1900s and I think late 1800s was one of the most developed countries in the world. It is pretty well understood that that is no longer so and they are still unable to borrow in international markets which does hurt your country.

In Iceland's case-- their entire economy is something like 4% of the economy of San Francisco alone... rather insignificant. They went through some pretty bad economic times but being tiny allows you to do things large countries simply can't.

On short-while I understand where you're coming from I just don't think it can work or would be helpful. While 14/15 trillion sounds like a lot you have to keep in mind that's about what the country produces each and every year. And if you magically get the debt to stop increasing and slap a 2-4% growth rate on the US economy for the next number of year... debt goes down. Debt/GDP ratio is very important. Not to justify the current state--but it's not exactly the main factor crippling the economy if managed correctly at this point.

[Paffnia]

No way. We'd never get another loan or bond sale again. Debt itself isn't necessarily bad, and as long as we continue to pay it back, we should be fine. Solving the debt crisis is simply not something that can be done simultaneously with solving a recession.

[HeartGround]

Good Morning,

Agree the USA will never default on its debt, America's economy is to inter-locked with the world economy

[Anime Daisuki]

Most people in the US know how much the world depends on them, to provide defense for Europe during the cold war, for example, and that theirs is the largest economy in the world.

Most don't realize the extent America's economy is dependent on the world, because the US Dollar acts as the world's reserve currency, the system is such that most nations now "invest" in the US to keep its economy afloat. If they don't buy those bonds and stop trading in the US dollar, the US government would not be able to finance its many functions.

If the US defaults, it will immediately lose alot of its global status. For example, if your bank suddenly said they are bankrupt and you lose all your savings. Will you put money in that bank again if it were to reopen tomorrow?

[tuhoe]

great responses,there have been suggestions that another currency such as the chinese yuan replace the dollar as the worlds reserve currency,when it comes to trust the world does look to the U.S and i cant see who else could command that trust

[Escanaba]

Default? We are not Italy for God's sake.

[Petalumadom]

Feb 8, 2012 4:14:40 GMT -5 Anime Daisuki said:

Most people in the US know how much the world depends on them, to provide defense for Europe during the cold war, for example, and that theirs is the largest economy in the world.

Most don't realize the extent America's economy is dependent on the world, because the US Dollar acts as the world's reserve currency, the system is such that most nations now "invest" in the US to keep its economy afloat. If they don't buy those bonds and stop trading in the US dollar, the US government would not be able to finance its many functions.

If the US defaults, it will immediately lose alot of its global status. For example, if your bank suddenly said they are bankrupt and you lose all your savings. Will you put money in that bank again if it were to reopen tomorrow?

You're right. It's an interesting mix. The US is currently paying record low rates for borrowing money in the market. The world is STARVING for the security of US treasuries because unfortunately/fortunately it is the most trusted security in the world. This allows the US to get away with its current policies... it's hard to argue we have a severe debt problem when the world is willing to buy 30 year treasuries for a barely 3% return a year!

I don't think it's quite correct to say people only invest to keep the US economy afloat... it still has the most attractive capital markets in the world and is the world's largest consumer nation. This keeps investors coming back for the returns and security.

Obviously if the world outside the US refused to trade dollars it would be terrible for the US--but also really for the rest of the world. The dollar is so intertwined with world trade you simply cannot withdraw it from global transactions right now.

For example. When Brazil wants to invest in China or sell some parts to each other etc. they don't exchange Brazilian Reals for Chinese Yuan--they get better exchange rates if brazil turns the Reals into dollars and China turns their Yuan into dollars and then they trade through the dollar. Markets are just more efficient in that way due to the trading volume.
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In response to your last post tuhoe--

The Yuan is currently a very very very far cry from being able to even compete with the US dollar. People forget that China is still an incredibly poor country. Five times more people with half (or less) the economic output of the US. The chinese government is still very protectionist and their financial system is almost entirely closed from the outside world for the time being.

People do trust china enough to lend them money and expect it back--they issue a few billion in debt every so often just to practice and receive very attractive rates. It's just that--as with all other countries in the world-- there is nothing with the size and volume of the US for the time being.

Russia and some other countries have been trying to diversify into holding Aussie and Canadian dollars to hold as reserve currencies--but they can only hold 5-10% of their reserves in those.

The Euro used to be a viable alternative to the dollar... still limited... but it was doing moderately well. That has largely changed the past few years with the euro fiscal crises.


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That was a lot of rambling. My apologies if some of tha tdoesnt make sense.

But basically--nothing to replace the dollar soon. and defaulting would just not work for anyone's benefit.

[tuhoe]

i believe that china keeps its yuan artifically low by buying truckloads of us t- notes thus making sure the dollar remains high making chinese exports attractive,suggestions were also made about returning the dollar to the gold standard

[Armetalia]

I don't see why we should default. All we need to do is get our act together. If we didn't spend money on this and that and the other thing, dropping billions on whatever we can, we wouldn't be in the hole anyways.