LogFAQs > #946496177

Revelation34 posted...

The only problem with defaulting would be because the country would never be trusted with a loan again. There's no way anybody could actually force the debt to be paid.

The US defaulting would be a financial event so cataclysmic, I'm not sure anybody would be able to actually predict all of the spin-off effects in detail. It's the financial equivalent of "what would happen if the US randomly launched off all their nuclear weapons?". It's a hell of a lot more serious than "the country would never be trusted with a loan again" (which, notably, isn't true).

Yes, no one has the ability to force the US (or any other sovereign entity) to pay a debt, that is true. But no one has to demand that the US pay up for it to cause a crisis - that's actually the last of America's worries in that scenario. Hell, the overwhelming majority of US debt is owned by American entities - private individuals, pension plans, corporations and, bizarrely, the government itself (yes, some branches of the US government have bought debt owed by other branches so they can use the interest as income - wrap your head around that one).

The first thing that would happen if the US stopped paying interest is that people would stop buying government bonds and would try and get rid of the ones they have (since they are now bad debt), which is pretty much the single-most damaging thing debt-holders can do given that the US is relying on their purchase of bonds to pay for the budget deficit (currently standing at over $1 trillion dollars and that's prior to a huge spike caused by COVID).

The US and the dollar are only important financially *because* they are seen as the ultimate safe-haven. Because the US is the world's strongest economy and doesn't default on its debts. US government bonds are one of the safest investments in the entire world, because of the US's unique status.

If the US suddenly announces that it is no longer paying the interest on its debt, that status is immediately and permanently lost. The initial effects would be something akin to a bank run on a mammoth scale, as capital flees the greenback in search of safer havens. The US would struggle to generate capital at this point - no one wants to lend to a country that has arbitrarily decided to no longer pay its debts. It would be faced with an unsavoury choice of having to spike interest rates in order to attract lenders willing to accept high risk, or going on an austerity binge to cut its own expenditures and start repairing its economy. Probably both. Meanwhile, the value of US bonds would plummet, as they would now be seen as having a fraction of their previous value thanks to their new risky status, and anyone who owns them would immediately be trying to sell them off as fast as possible.

However, because US bonds are the benchmark against which all other bonds are set, something that causes the interest rate on US bonds to spike will do the same to virtually everything else. Overnight, everything would immediately become significantly more expensive, as the interest rates on car loans, mortgages, business loans, and virtually every other form of debt or bond suddenly increases, likely by an enormous amount; banks would severely curtail their lending, unwilling to take on risk in such a volatile environment. That would trigger a meltdown, as companies lay off employees and minimize investments as they scramble to try and adjust to the higher cost of doing business.

Stock markets around the world would crash, with ground zero being US markets. The US would struggle to pay its own bills, including to government workers and to social programs like Social Security and Medicare. Retirement plans would become worthless overnight. The resultant inflation would wipe out a significant portion of everyone's savings, as the price of living soars.

This, however, still manages to be a gross oversimplification of what would happen. As previously mentioned, something as catastrophic as a US default would be such a calamitous and unprecedented event, I'm not sure there's anyone in the world who could accurately predict and quantify everything that would come out of it.

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