Lets talk default.

[Jamisjockey]

I hear about it frequently, especially on certain talk shows on the radio.  But I'm not sure what it really means if we default on our debt.
How does that work if we actually default on our debt as a nation?

[AZRedhawk44]

Wheelbarrows of money for a loaf of bread.

Internally, our money situation won't much matter.  You want a bag of oranges from the citrus grove down the street from you, they'll cost about the same aside from the farmer's increased expenses for anything he's reliant upon that comes from overseas.  But ANY resource we need from abroad will be astronomically expensive.  May as well park your car on blocks.  Gas will be $50/gal overnight if we default.  Say goodbye to many plastic doodads that you take for granted.  Zipties and other fasteners will be worth over a buck each, instead of bags of 500 for $10 or so.

No one will want our T-bills.  No one will want our money when doing business.  Our nation will become a direct-barter trade nation for a few years until we develop a stronger manufacturing base domestically.

[makattak]

Someone will come on here any moment now and tell you default is impossible as we hold sovereignty over our currency.

While that is technically true that we cannot ever are very unlikely to default, it doesn't brighten the picture. What AZRedhawk just said is what will happen, except the bag of oranges WILL cost you more.

EVERYTHING will cost you more as we drop into hyperinflation. Dollars will be worthless and people will likely begin to barter again.

[Tallpine]

Actually, the hyperinflation will come from printing money in order to not default

[AZRedhawk44]

The mechanics of it will be tricksome to follow by lay folks.

The easiest way to inflate our way out of trouble is via the M3 supply, which is digitized and never fully quantified to us anymore.  Only the Treasury and the Fed Reserve know what the M3 is valued at right now.  But, it's a simple job for the government to just flip a switch and suddenly have another $1 trillion in reserves to make a payment to a creditor.  The creditor doesn't know the US account level.  The rest of the world doesn't know the account level.  They just know if the check bounces or not.

What I find scary right now is the housing deflation that's still going on despite the rise in consumer good inflation.  That doesn't bode well for long term stability.

Housing, being a primary source of credit for most of America, represents our fullest borrowing capacity for most of us.  That available credit pool is shrinking.

[makattak]

Actually, the hyperinflation will come from printing money in order to not default

That's what I just said. Hence the "we can't technically default."

However, if you're paying someone back with assets that are worth far less than what you borrowed, I'd argue that's a type of default.

[CSM Kersh]

I  hear about it frequently, especially on certain talk shows on the radio.  But I'm not sure what it really means if we default on our debt.
How does that work if we actually default on our debt as a nation?[/quote]

Think Germnay, 1932...

[Tallpine]

The USA could default, just like the USSR defaulted 

Or maybe default is Fistful ? 

[RevDisk]

I hear about it frequently, especially on certain talk shows on the radio.  But I'm not sure what it really means if we default on our debt.
How does that work if we actually default on our debt as a nation?

If we default, we are simply deciding not to pay back what is owed.  It's unlikely to happen, as your credit rating will be at junk status and no one will likely lend you money again for a very long time. 

This is an entirely different situation than inflation away the debt by essentially "printing money" (inflating the money supply).

I'm not sure about the legality of defaulting, but it's obviously entirely possible.  The government could simply refuse to pay the bills as they come due.  Allegedly, according to legal theorists, the federal government cannot declare bankruptcy (which is different than defaulting) as it is sovereign.  An additional fun fact is that, according to the US government, they are immune from all lawsuits unless they voluntarily surrender said sovereign immunity.  So technically they could just stop paying certain bills and then claim that they can't be sued for recovering assets.

[Fly320s]

The creditor doesn't know the US account level.  The rest of the world doesn't know the account level.

Does the US/Treasury actually have an account somewhere?

[AZRedhawk44]

Does the US/Treasury actually have an account somewhere?

Aren't tax refund checks cut from "The United States Treasury?"  I thought they were.  Certainly not from Wells Fargo, Chase, or some other bank.

[Scout26]

Yep, Weimar Germany in the early 30's

Italy

Zimbabwe

Argentina


Except we are pretty much the economic engine of the world.  If we default, well the economic situation would be Atlas Shrugged.

[PTK]

Except we are pretty much the economic engine of the world.  If we default, well the economic situation would be Atlas Shrugged.

While that may have been true 20+ years ago, it is no longer true today.

It's not something comfortable to accept or think of, but... life rarely is pleasant to dwell on when discussing global scale.

[Headless Thompson Gunner]

Actually, the hyperinflation will come from printing money in order to not default

This.  It's unlikely that we will actually default, as we can inflate our way out of debt. 

If by some weird chance we do default, I would expect major deflation to be the likely result.  Treasury notes form the backbone of bank reserves, and if we default on those, their value plummets and the money supply collapses.

[Headless Thompson Gunner]

Aren't tax refund checks cut from "The United States Treasury?"  I thought they were.  Certainly not from Wells Fargo, Chase, or some other bank.

The US Treasury is the paymaster for the government.  Payments made to the government are made to the Treasury, and payments made by the government come from the Treasury.  They're the member of the family that controls the checkbook and pays the bills, so to speak.

Excess money held by the Treasury is deposited in a special bank account at the Federal Reserve.  Externally (from the perspective of the Treasury) this account functions just like any ordinary checking account you and I might have. 

[Headless Thompson Gunner]

While that may have been true 20+ years ago, it is no longer true today.

It's not something comfortable to accept or think of, but... life rarely is pleasant to dwell on when discussing global scale.

It is absolutely true today.  One need only look at the impact the US subprime mortgage mess had on the world economy.  You can't deny that what happened here wrenched the economies everywhere else in the world.

[Northwoods]

It is absolutely true today.  One need only look at the impact the US subprime mortgage mess had on the world economy.  You can't deny that what happened here wrenched the economies everywhere else in the world.

Yes and no.  A lot of other countries participated in the same speculative stupidity that the USA did and they got "wrenched" for same reasons we did.  The USA might have been the first domino, but the other countries voluntarially put themselves in the same line.