There is a part of me (I'm a UK resident) that looks at this and wants to see what would happen. As an outsider looking in (and having lived in the USA in the 80s), I don't see a country, I see corporation. A place where the rich really are rich and the poor can go f*ck themselves, but the poor don't seem to mind, y'know, cos America is awesome. Also they don't appear to have a voice.
Do I think the UK is in a better position? Possibly. I think the EU has probably helped to hold back on corporate dominance. Legislation is less about supporting corporations and more about supporting society. (I do think we have a free speech issue. Glenn Greenwald in an interview said he would fly to USA but not to the UK as he had better legal protection.)
The more interesting question most banks/countries must be asking themselves, "How do we get out of the USD?"
Be careful, the UK's total external debt has exceeded 10 trillion[0]. We have huge financial sector debt here and are worse exposed to financial shock from the banking system than almost all countries globally.
Agreed that getting out of the USD hegemony is inevitable. As to whether it will be an orderly transition, I'd say that is far from assured, especially in the UK.
Trust me, no bank in the world right now is trying to trade in all their dollars for British pounds.
Also, if you factor in the high cost of living, which is a side effect of the UK system, being a poor person in the UK is a pretty shitty situation to be in, certainly not something to smugly celebrate.
Always interesting to speculate about what would happen.
A default in the traditional sense probably won't happen this October but one day in our lifetime they are going to have to come up with a way to finance the 126 trillion unfunded liabilities:
http://www.usdebtclock.org/
One way to do that - without defaulting in a legal sense - is to work the printing press and call it stimulation or monetary easing. Nah, Quantitative easing! That's a nice term.
It's misleading to call those unfunded liabilities. Most of that is Social Security and Medicare projected expenditures. Unlike true liabilities, those are not legally guaranteed. The government can reduce eligibility for those programs, reduce payouts, etc, without being in default, unlike say a state pension plan.
Comparing them against current assets is equally misleading. Say you plan to spend $2k on rent for the indefinite future. That's $24k per year, $240k per decade, etc. Are you insolvent if you don't have all that in the bank now? No, of course not. Those are ongoing expenses paid out of ongoing income.
The Medicare trustee estimates the unfunded liability of Medicare at $40 trillion over 75 years (the $123 trillion figure includes a Medicare estimate of twice that). Projected GDP over that period is $907 trillion.
Finally, there is nothing wrong with quantitative easing. The people that'll be hurt by inflation are by and large the same ones whose fault the current financial mess is (older people own most u.s. assets). The government will probably encourage inflation at some point to reduce the value of these expenditures as a percentage of GDP without making nominal cuts. I don't see a problem with that readjustment.
Whenever I see interesting events like this, my first thought is not "what would happen" but always "how could I profit from what would happen [or the uncertainty around it]".
Unfortunately I never know how to answer that question convincingly enough to put my money where my mouth is. Does anybody know if there's a place where people discuss these sorts of things, e.g. a "Hacker News for Financial Markets"? Any interesting ideas for coming out of this on top?
EDIT: Two answers have pointed to gold. Yup, I have already played with investing in gold ETFs, which generated a 20% return over the past 2 years, even after fees. However I was wondering if there were any more ideas specific to the present circumstances, and where, if anywhere, people discuss this sort of thing?
What I find interesting is that the economists tell us that country level borrowing isn't the same as household borrowing.
Which must be true otherwise why would governments be able to borrow more? Clearly they can devalue the currency and by extension the debt, however the money lenders will just factor that into their interest rates.
I like a country to be in debt, that way it will always be looking for efficiencies. The question is how much debt is acceptable?
Raise retirement to 70, go single-payer and name the price of all things medical, and put a little resistance on SSD claims and then there's no problem. That's because these "liabilities' are actually discretionary, unlike actual bonds.
The world can't afford a super power. The world needs to diversify it's interests and insist on total nuclear disarmament. Imagine a sidelined and flat broke USA with neo-cons at the helm, with access to the big red button. That scares me, and it should scare everyone.
If aliens were to arrive, they would probably ask our university professors why the economic system has a single point of failure.
And then after a while they would ask us why we are driving around in motor vehicles powered by a non-renewable resource.
And then after some more reflection they would ask us why we get our news and form our opinion of consensus reality based on a tiny number of sources, all of which generally agree with one another and which also happen to generally agree with the single point of failure in the first question.
And then we would hear a strange noise: alien laughter.
Speaking as someone who receives his income in dollars, I hope US defaults. Maybe then people in US will finally start to give a second thought on the US military expansion all over the world, and the trillions of dollars it's spending on weaponry. There are a lot of domestic programs are that very wasteful, too - not just the police militarization ones, but also social ones.
Maybe this will make them look at every program from sub 100,000 in funding to the hundreds of billions of dollars. Almost $4 trillion in spending a year with a little over $2 trillion a year as income is simply unsustainable, no matter how you cut it. I think everyone can see that. As others mention, the default will happen eventually. It's just a matter of time, and the more it's delayed, the bigger the impact will be.
What worries me most, though, is that if an imminent collapse of the dollar will happen in the future because countries start dropping the dollar, out of desperation, US will start becoming a lot more aggressive in its bullying, and possibly even take military action against them for "hurting their economy", or at the very least use NSA surveillance to blackmail them into not doing so (my guess is that's already happening, though), and it's part of their "diplomacy" with those countries.
It's unlikely that the US will ever really default in the near future. Why ? Well, the global economy is becoming more and more linked as time passes. A US default will trigger a collapse in the larger global financial markets. Do US creditors want this ? Nope. They'll just keep extending deadlines but of course this charade can only last for a certain amount of time. Personally, I think the collapse will not come from a US default but due to this bubble over extending itself and eventually popping in a Lehman'esque style.
An example of this is how last year India (a developing country, although with a rather large GDP) donated money to the European Union in the form of an economic stimulus, basically to prevent a default. The reason was simple, an unstable european market hurts growth prospects worldwide. There's a saying in India "When Wall Street sneezes the Indian markets catch a cold". An increasingly linked global economy puts economic stability at #1 on everyone's agenda. Of course, this is great for the US because they can wage wars, etc. etc. while taking on unlimited debt and no one wants to lift a finger (militarily, they can't - economically, they can't either because of the repercussions). Of course the bubble will pop at some point. We don't know when, though.
By that standard, we should not just kill the military but :
1) social security
2) medicare
3) Obamacare (because it will merge with 2)
I don't think Obamacare is a bad idea, BTW, coming from Europe. I just want to point out that cutting the military, which arguably helps more people than social security, is not the solution.
Europe has the same problem. Social security simply can't be maintained, yet people won't give it up.
Sorry, but the idea that a failure to raise the debt ceiling "is most certainly going to happen" is laughable.
It might happen. It's highly unlikely, but not impossible.
If you're so certain, you should be shorting the whole market and laughing your way to the bank.
EDIT: Not to get too partisan, but the justification for not negotiating on the debt ceiling is to put a stop to the use of the debt ceiling as a form of political hostage taking.
To let this sort of thing go on gives Congress a de facto veto power over the executive branch that was never laid out in the constitution. Once you let Congress know that a majority (in a single chamber!) can get whatever they want simply by threatening to tank the whole economy, there's no going back.
That's why it's the rational policy to refuse to negotiate when a single house of a single branch of Congress starts threatening that sort of thing.
I may be stating the blatantly obvious here, but :
1) Neither the US nor any European country, nor the middle east, nor the far east (Abeonomics or not) will ever stop rolling over their debts. Not just because they don't want to. Because they can't. This means interest payments rising at a rate faster than inflation a given.
2) "Real" expenditures (as demostrated by the US shutdown for example) take precedence over loan repayments. As they should.
3) This being blatantly obvious is not stopping a great many people from buying ridiculously bad government debt. The US, all of Europe (not just the EU), Japan and most of Asia with it, are trying to induce inflation by printing exponentially more money over time. It's not working, meaning none of those countries are getting any closer to paying back their debts, even if it was realistic.
1+2+3 = Every country on this planet, with few exceptions, will default on their debts. They may do it by hyperinflation (unlikely, as it will make all of the population very unhappy) or they may just outright default (just makes investors unhappy, and as Greece demonstrated[1], they have very few options left). But there is no way out of this situation that does not involve a large number of government defaults.
We've long since jumped from the plane. And what's this thing coming toward me very fast? So big and flat and round, it needs a big wide sounding name like 'Ow', 'Ownge', 'Round', 'Ground'! That's it! Ground! Ha! I wonder if it'll be friends with me? Hello, Ground!
It's entirely possible for a country to pay off its debts, gradually, if the politics lines up. The US was making plans for that eventuality under Clinton. Germany paid off large amounts of loans, even if it took them fifty years. Stop fighting so many wars, stop cutting taxes on the rich, and you'll get there.
People buy government debt in part because there's not anywhere safer to put the money. Banks fail, money under the mattresses can be stolen or destroyed, etc. Also, to a certain extent I think our current economic setup relies on the Government going into debt in order to support private-sector spending.
Because governments can always fund debt with new debt, the inevitable default can be postponed indefinitely. The main risk is that interest payments get out of control, which is what made Greece go bankrupt. Or, of course, that a country refuses to take on new debt to fund old debt, like the House is now threatening to do.
Of course threatening to default is also likely to make interest payments spiral out of control. But if the country pays its debts in a timely manner and keeps total interest under control, it can keep this up forever.
The US can't default on their promise to pay or there is a very high risk it will be lights out for them for world reserve which will be instant hyperinflation.
As world reserve they have had to spend into existence a metric craptonne more currency than their economy requires in order to lubricate world trade (google Triffins dilemma).
ie: For Turkey (say) to buy oil off Saudi, they need to sell something to the US in order to obtain USD first.
When world reserve status is lost, suddenly Turkey doesn't need USD in order to acquire oil. The rest of the world is holding USD for trading purposes and those USD currently never go home in order to claim something from the US economy.
Now lets turn the lights off on USD as world reserve: Those now useless trade dollars will try and find their way home to the US and start chasing things milk, eggs, cars...anything in the real world that has value as the currency devalues.
Meanwhile, the USGovt is having trouble acquiring its goods and services with its rapidly inflating USD and doubles down on printing under Executive Order 13603.
When this one blows, one doesn't want to be caught holding assets denominated in USD.
This scenario you describe will probably happen, but most likely not in the next few years... Our debt-to-GDP ratio simply isn't high enough yet.
However, when it does happen it will happen very suddenly and will be completely unexpected (when the US fails to find enough buyers in a round of debt sales) so the timing is hard to predict.
"paying back their debts" isn't a goal of any country, nor should it be. National debt as a % of GDP should go up and down depending on the economic situation, the current policy goals of the country, and so on. It's important not to let the debt grow too much, but having a zero debt doesn't make sense.
[+] [-] awjr|12 years ago|reply
Do I think the UK is in a better position? Possibly. I think the EU has probably helped to hold back on corporate dominance. Legislation is less about supporting corporations and more about supporting society. (I do think we have a free speech issue. Glenn Greenwald in an interview said he would fly to USA but not to the UK as he had better legal protection.)
The more interesting question most banks/countries must be asking themselves, "How do we get out of the USD?"
[+] [-] bodski|12 years ago|reply
Agreed that getting out of the USD hegemony is inevitable. As to whether it will be an orderly transition, I'd say that is far from assured, especially in the UK.
[0] http://en.wikipedia.org/wiki/List_of_countries_by_external_d...
[+] [-] drcode|12 years ago|reply
Also, if you factor in the high cost of living, which is a side effect of the UK system, being a poor person in the UK is a pretty shitty situation to be in, certainly not something to smugly celebrate.
[+] [-] flexie|12 years ago|reply
A default in the traditional sense probably won't happen this October but one day in our lifetime they are going to have to come up with a way to finance the 126 trillion unfunded liabilities: http://www.usdebtclock.org/
One way to do that - without defaulting in a legal sense - is to work the printing press and call it stimulation or monetary easing. Nah, Quantitative easing! That's a nice term.
[+] [-] rayiner|12 years ago|reply
Comparing them against current assets is equally misleading. Say you plan to spend $2k on rent for the indefinite future. That's $24k per year, $240k per decade, etc. Are you insolvent if you don't have all that in the bank now? No, of course not. Those are ongoing expenses paid out of ongoing income.
The Medicare trustee estimates the unfunded liability of Medicare at $40 trillion over 75 years (the $123 trillion figure includes a Medicare estimate of twice that). Projected GDP over that period is $907 trillion.
Finally, there is nothing wrong with quantitative easing. The people that'll be hurt by inflation are by and large the same ones whose fault the current financial mess is (older people own most u.s. assets). The government will probably encourage inflation at some point to reduce the value of these expenditures as a percentage of GDP without making nominal cuts. I don't see a problem with that readjustment.
[+] [-] lusr|12 years ago|reply
Unfortunately I never know how to answer that question convincingly enough to put my money where my mouth is. Does anybody know if there's a place where people discuss these sorts of things, e.g. a "Hacker News for Financial Markets"? Any interesting ideas for coming out of this on top?
EDIT: Two answers have pointed to gold. Yup, I have already played with investing in gold ETFs, which generated a 20% return over the past 2 years, even after fees. However I was wondering if there were any more ideas specific to the present circumstances, and where, if anywhere, people discuss this sort of thing?
[+] [-] nextw33k|12 years ago|reply
Which must be true otherwise why would governments be able to borrow more? Clearly they can devalue the currency and by extension the debt, however the money lenders will just factor that into their interest rates.
I like a country to be in debt, that way it will always be looking for efficiencies. The question is how much debt is acceptable?
[+] [-] Zigurd|12 years ago|reply
[+] [-] laichzeit0|12 years ago|reply
[+] [-] tomelders|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] dbpokorny|12 years ago|reply
And then after a while they would ask us why we are driving around in motor vehicles powered by a non-renewable resource.
And then after some more reflection they would ask us why we get our news and form our opinion of consensus reality based on a tiny number of sources, all of which generally agree with one another and which also happen to generally agree with the single point of failure in the first question.
And then we would hear a strange noise: alien laughter.
[+] [-] devx|12 years ago|reply
Maybe this will make them look at every program from sub 100,000 in funding to the hundreds of billions of dollars. Almost $4 trillion in spending a year with a little over $2 trillion a year as income is simply unsustainable, no matter how you cut it. I think everyone can see that. As others mention, the default will happen eventually. It's just a matter of time, and the more it's delayed, the bigger the impact will be.
What worries me most, though, is that if an imminent collapse of the dollar will happen in the future because countries start dropping the dollar, out of desperation, US will start becoming a lot more aggressive in its bullying, and possibly even take military action against them for "hurting their economy", or at the very least use NSA surveillance to blackmail them into not doing so (my guess is that's already happening, though), and it's part of their "diplomacy" with those countries.
[+] [-] ashray|12 years ago|reply
An example of this is how last year India (a developing country, although with a rather large GDP) donated money to the European Union in the form of an economic stimulus, basically to prevent a default. The reason was simple, an unstable european market hurts growth prospects worldwide. There's a saying in India "When Wall Street sneezes the Indian markets catch a cold". An increasingly linked global economy puts economic stability at #1 on everyone's agenda. Of course, this is great for the US because they can wage wars, etc. etc. while taking on unlimited debt and no one wants to lift a finger (militarily, they can't - economically, they can't either because of the repercussions). Of course the bubble will pop at some point. We don't know when, though.
[+] [-] waps|12 years ago|reply
1) social security
2) medicare
3) Obamacare (because it will merge with 2)
I don't think Obamacare is a bad idea, BTW, coming from Europe. I just want to point out that cutting the military, which arguably helps more people than social security, is not the solution.
Europe has the same problem. Social security simply can't be maintained, yet people won't give it up.
[+] [-] ck2|12 years ago|reply
The problem is all the negotiations had a hold placed on them. Take a guess who put the hold on them.
The timelines dissecting what actually happened next month are going to be epic in a very bad way.
[+] [-] patdennis|12 years ago|reply
It might happen. It's highly unlikely, but not impossible.
If you're so certain, you should be shorting the whole market and laughing your way to the bank.
EDIT: Not to get too partisan, but the justification for not negotiating on the debt ceiling is to put a stop to the use of the debt ceiling as a form of political hostage taking.
To let this sort of thing go on gives Congress a de facto veto power over the executive branch that was never laid out in the constitution. Once you let Congress know that a majority (in a single chamber!) can get whatever they want simply by threatening to tank the whole economy, there's no going back.
That's why it's the rational policy to refuse to negotiate when a single house of a single branch of Congress starts threatening that sort of thing.
[+] [-] waps|12 years ago|reply
I may be stating the blatantly obvious here, but :
1) Neither the US nor any European country, nor the middle east, nor the far east (Abeonomics or not) will ever stop rolling over their debts. Not just because they don't want to. Because they can't. This means interest payments rising at a rate faster than inflation a given.
2) "Real" expenditures (as demostrated by the US shutdown for example) take precedence over loan repayments. As they should.
3) This being blatantly obvious is not stopping a great many people from buying ridiculously bad government debt. The US, all of Europe (not just the EU), Japan and most of Asia with it, are trying to induce inflation by printing exponentially more money over time. It's not working, meaning none of those countries are getting any closer to paying back their debts, even if it was realistic.
1+2+3 = Every country on this planet, with few exceptions, will default on their debts. They may do it by hyperinflation (unlikely, as it will make all of the population very unhappy) or they may just outright default (just makes investors unhappy, and as Greece demonstrated[1], they have very few options left). But there is no way out of this situation that does not involve a large number of government defaults.
We've long since jumped from the plane. And what's this thing coming toward me very fast? So big and flat and round, it needs a big wide sounding name like 'Ow', 'Ownge', 'Round', 'Ground'! That's it! Ground! Ha! I wonder if it'll be friends with me? Hello, Ground!
[1] http://www.tradingeconomics.com/greece/government-bond-yield
[+] [-] lmm|12 years ago|reply
[+] [-] makomk|12 years ago|reply
[+] [-] mcv|12 years ago|reply
Of course threatening to default is also likely to make interest payments spiral out of control. But if the country pays its debts in a timely manner and keeps total interest under control, it can keep this up forever.
[+] [-] wintersFright|12 years ago|reply
As world reserve they have had to spend into existence a metric craptonne more currency than their economy requires in order to lubricate world trade (google Triffins dilemma).
ie: For Turkey (say) to buy oil off Saudi, they need to sell something to the US in order to obtain USD first. When world reserve status is lost, suddenly Turkey doesn't need USD in order to acquire oil. The rest of the world is holding USD for trading purposes and those USD currently never go home in order to claim something from the US economy.
Now lets turn the lights off on USD as world reserve: Those now useless trade dollars will try and find their way home to the US and start chasing things milk, eggs, cars...anything in the real world that has value as the currency devalues. Meanwhile, the USGovt is having trouble acquiring its goods and services with its rapidly inflating USD and doubles down on printing under Executive Order 13603.
When this one blows, one doesn't want to be caught holding assets denominated in USD.
[+] [-] drcode|12 years ago|reply
However, when it does happen it will happen very suddenly and will be completely unexpected (when the US fails to find enough buyers in a round of debt sales) so the timing is hard to predict.
[+] [-] danmaz74|12 years ago|reply