If the US Gov. defaults on it's debt...?

begood20000

If the US Government defaults on it's debt will that in turn cause another financial crisis that could result in Irish banks collapsing, hence everyone losing their savings?

Forgive me if the above is a silly question but perhaps there is someone here a little more informed on such matters

KyussBishop

The US constitution prevents a default, in Amendment 14 Section 4:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

http://www.archives.gov/exhibits/charters/constitution_amendments_11-27.html

begood20000

KyussBishop wrote: »

The US constitution prevents a default, in Amendment 14 Section 4:

http://www.archives.gov/exhibits/charters/constitution_amendments_11-27.html

But in reality if they keep raising the debt ceiling they might get to a stage where no one will lend to them anymore, so it doesn't matter if the constitution allows it or not

KyussBishop

It matters because the US literally can't default, without first changing the constitution - there's not really a shortage of people willing to invest in US bonds, so if the debt ceiling is raised, finding people to buy US bonds won't be difficult.

Rightwing

begood20000 wrote: »

If the US Government defaults on it's debt will that in turn cause another financial crisis that could result in Irish banks collapsing, hence everyone losing their savings?

Forgive me if the above is a silly question but perhaps there is someone here a little more informed on such matters

I can't see them default on their debt. But it would lead to a much bigger financial crisis that 08 if they did. Even what's happening at the moment is damaging from an investor's viewpoint. US credibility is low.

Amirani

It's essentially impossible for a country such as the US to default on its debt. They can print money and use inflation as a debt reduction tool if they need to.

Rightwing

NiallSparky wrote: »

It's essentially impossible for a country such as the US to default on its debt. They can print money and use inflation as a debt reduction tool if they need to.

How did Argentina default then ?

KyussBishop

Argentina had a debt denominated in US Dollars, not a locally controlled currency. The debt of the US is entirely made up of their own currency.

The currency that a countries debt is made up of, whether that currency is in control of the local government, or is controlled by a foreign nation, is of critical importance to the stability of that countries debt (and arguably, is of critical importance to the countries sovereignty).

Foreign-denominated debt, is the root cause of most prominent hyperinflations - if countries end up having to pay off debt by printing local currency, and exchanging it for foreign currency, this devalues the local currency, meaning even more has to be printed to pay off the debt.

If a country is forced to repay foreign-denominated debt without any flexibility (such that printing money occurs), as happened with Weimar Germany due to the Versailles treaty, then this can set in place a vicious cycle that leads to hyperinflation.

Causes of some modern instances of hyperinflation:

andrew

The United States most definitely can default on it's debt if it chooses to do so. The issue here is whether the US Treasury will be allowed to issue more US Treasuries. That the debt is denominated in Dollars, or that the Federal Could purchase Treasuries by issuing dollars is not relevant here.

OP, there's an article here which goes into some detail about what could happen. The article assumes that what would likely happen is that the US would forgo other spending in order to service it's debt. This spending reduction would lead to a large fall in GDP, as it would not be offset by the 'automatic stabilisers' of fiscal policy which usually accompany GDP reductions.

The implications for the world economy would stem from the resultant reduction in US demand for goods produced in other countries, and the destabilising effect a US default (or something like it) would have on financial markets. So in practical terms, many EU countries, especially Ireland, would see demand for their exports fall. In addition, the interest rate on many financial instruments is calculated as being the interest rate on US Government debt, plus a little extra. If the interest rate on US debt goes up, then the interest rate on many other types of loan would also go up. This is is bad for those who have borrowed money, as it means they won't be able to pay it back.

Since such a default has never happened, there are many unknowns. It's impossible to know exactly what would happen. The only certainty is that it would be very very bad, and as such it's unlikely that politicians would let it happen.

Rightwing

andrew wrote: »

The United States most definitely can default on it's debt if it chooses to do so. The issue here is whether the US Treasury will be allowed to issue more US Treasuries. That the debt is denominated in Dollars, or that the Federal Could purchase Treasuries by issuing dollars is not relevant here.

OP, there's an article here which goes into some detail about what could happen. The article assumes that what would likely happen is that the US would forgo other spending in order to service it's debt. This spending reduction would lead to a large fall in GDP, as it would not be offset by the 'automatic stabilisers' of fiscal policy which usually accompany GDP reductions.

The implications for the world economy would stem from the resultant reduction in US demand for goods produced in other countries, and the destabilising effect a US default (or something like it) would have on financial markets. So in practical terms, many EU countries, especially Ireland, would see demand for their exports fall. In addition, the interest rate on many financial instruments is calculated as being the interest rate on US Government debt, plus a little extra. If the interest rate on US debt goes up, then the interest rate on many other types of loan would also go up. This is is bad for those who have borrowed money, as it means they won't be able to pay it back.

Since such a default has never happened, there are many unknowns. It's impossible to know exactly what would happen. The only certainty is that it would be very very bad, and as such it's unlikely that politicians would let it happen.

Agreed, I think it will be the decisions of others that will eventually decide the US govt fate. The big factors:
inflation, depreciation of the US$, (loss of reserve currency status), inability to meet int repayments. I can't see much way out for them.

sin_city

Wow, some people really don't understand the situation.

The US will never default in a conventional way.

It will default by inflation and printing its way out of debt...pretty obvious, it's currently doing this.

No sane person would be buying a 30 year bond that has a 3% yield. Who's buying? The Fed.

Rightwing

sin_city wrote: »

Wow, some people really don't understand the situation.

The US will never default in a conventional way.

It will default by inflation and printing its way out of debt...pretty obvious, it's currently doing this.

No sane person would be buying a 30 year bond that has a 3% yield. Who's buying? The Fed.

I will attempt that, but that can't happen. The $ will become worthless, that's the key problem facing them.

sin_city

Rightwing wrote: »

I will attempt that, but that can't happen. The $ will become worthless, that's the key problem facing them.

I think you misunderstood. I am in agreement with you.

Ya better get your gold and silver:D

Rightwing

sin_city wrote: »

I think you misunderstood. I am in agreement with you.

Ya better get your gold and silver:D

Having a bad of time it atm.

sin_city

Rightwing wrote: »

Having a bad of time it atm.

Good... more time to get more at a good price.

noodler

sin_city wrote: »

Wow, some people really don't understand the situation.

The US will never default in a conventional way.

It will default by inflation and printing its way out of debt...pretty obvious, it's currently doing this.

No sane person would be buying a 30 year bond that has a 3% yield. Who's buying? The Fed.

Whilst, I never thought it was going to happen....I don't know if I 100% agree with your interpretation.

If the debt ceiling cannot be raised, how does the US refinance debt? The FED printing money would be to buy more US treasuries - right? but that would increase the level of US debt.

KyussBishop

Here is an interesting take on the debt ceiling parade, and how it applies to the world as a whole:
http://www.golemxiv.co.uk/2013/10/global-debt-global-currency/

In the context of that, a default would not be advantageous for anyone (people holding US debt would lose out on that), it is far better explained as part of the push to limit the use of debt for public funding, both to allow greater private use of debt instead, and to weaken public services so they can eventually be privatized (probably in the next economic crisis).

Since the debt ceiling only ever gets pushed back, we can be promised more of the same this January(?), and again after that, aimed at cutting public funding (a default would be incredibly unlikely, due to the politics).

sin_city

noodler wrote: »

Whilst, I never thought it was going to happen....I don't know if I 100% agree with your interpretation.

If the debt ceiling cannot be raised, how does the US refinance debt? The FED printing money would be to buy more US treasuries - right? but that would increase the level of US debt.

They have to keep raising the debt. To pay the previous years debt they need to borrow more.

The US debt can never and will never be paid.

Their money is debt.

Rightwing

sin_city wrote: »

They have to keep raising the debt. To pay the previous years debt they need to borrow more.

The US debt can never and will never be paid.

Their money is debt.

And the big problem is, the $ is losing so much value, even against the € it's

€1 : $1.38

andrew

A reminder (before anyone links the 'money as debt' video), that this forum is dedicated to Academic Economics. As such, claims and discussions should be supportable by academic sources. Any discussions which veer significantly from this standard will be closed.

If you have any questions regarding this, please ask them via PM.

KyussBishop

Here is a paper from Real World Economics Review, which is a peer reviewed economics journal, on that topic (money creation by private banks):
http://www.paecon.net/PAEReview/issue63/Haring63.pdf

Here is the journal site:
http://www.paecon.net/PAEReview/

I don't mean to be cynical, but I get the feeling people would prefer this topic not be discussed at all, no matter how credible/important it is - so since the above meets the request of a peer reviewed journal/article, I'd hope that's honoured and that no special pleading is used to backtrack on it.

andrew

KyussBishop wrote: »

Here is a paper from Real World Economics Review, which is a peer reviewed economics journal, on that topic (money creation by private banks):
http://www.paecon.net/PAEReview/issue63/Haring63.pdf

Here is the journal site:
http://www.paecon.net/PAEReview/

I don't mean to be cynical, but I get the feeling people would prefer this topic not be discussed at all, no matter how credible/important it is - so since the above meets the request of a peer reviewed journal/article, I'd hope that's honoured and that no special pleading is used to backtrack on it.

To be clear, my above warning refers to the following comment, and not money creation (everyone who has taken macroEconomics 101 knows that commercial banks create money).

"They have to keep raising the debt. To pay the previous years debt they need to borrow more. "

Taken as it is from the 'money as debt' videos, I wanted to make clear that this forum requires as a minimum that discussion be rooted in Academic Economic theory, and not youtube videos.

Rightwing

andrew wrote: »

To be clear, my above warning refers to the following comment, and not money creation (everyone who has taken macroEconomics 101 knows that commercial banks create money).



Taken as it is from the 'money as debt' videos, I wanted to make clear that this forum requires as a minimum that discussion be rooted in Academic Economic theory, and not youtube videos.

KB, do you accept that they can only let the $ depreciate to a certain level, be $2 to the € or whatever level?

Andrew, I can't see anything wrong with someone saying they have to print more money, that's the key problem facing Japan and the US as far as I can see. They have boxed themselves into a corner.

KyussBishop

andrew wrote: »

To be clear, my above warning refers to the following comment, and not money creation (everyone who has taken macroEconomics 101 knows that commercial banks create money).



Taken as it is from the 'money as debt' videos, I wanted to make clear that this forum requires as a minimum that discussion be rooted in Academic Economic theory, and not youtube videos.

Ah, right so, excuse me

KyussBishop

Rightwing wrote: »

KB, do you accept that they can only let the $ depreciate to a certain level, be $2 to the € or whatever level?

Andrew, I can't see anything wrong with someone saying they have to print more money, that's the key problem facing Japan and the US as far as I can see. They have boxed themselves into a corner.

I'm not sure really - I think there are other options that are perfectly viable (such as directly using money creation for funding, and slowly paying down public debt - and, even though it sounds counterintuitive, this is less inflationary than using more public debt for funding), but that'd have to be a discussion for the MMT thread

On the current course of action by the US, within the restrictions of the current system: The public debt will never be payed down, but if they get economic growth at full capacity again, they should be able to keep the debt rolling over permanently without significant depreciation.

Rightwing

KyussBishop wrote: »

I'm not sure really - I think there are other options that are perfectly viable (such as directly using money creation for funding, and slowly paying down public debt - and, even though it sounds counterintuitive, this is less inflationary than using more public debt for funding), but that'd have to be a discussion for the MMT thread

On the current course of action by the US, within the restrictions of the current system: The public debt will never be payed down, but if they get economic growth at full capacity again, they should be able to keep the debt rolling over permanently without significant depreciation.

I have a position open at the open atm, long on the $ v €, big loser and i'm annoyed at myself because I'm pessimistic and negative on the course of action the US is taking.

It will be fascinating to watch it play out over the next few years, 1 way or the other.

KyussBishop

Ah, well I'd certainly not be qualified to give financial/investment advice of any kind, heh I glean what I know from sites like www.nakedcapitalism.com, which I think is a reasonably good source (they cover primarily the US, and are usually very good on the debt ceiling stuff) - but no idea how much so for that purpose.

sin_city

andrew wrote: »

To be clear, my above warning refers to the following comment, and not money creation (everyone who has taken macroEconomics 101 knows that commercial banks create money).



Taken as it is from the 'money as debt' videos, I wanted to make clear that this forum requires as a minimum that discussion be rooted in Academic Economic theory, and not youtube videos.

<snip>

Back on the topic....

Am I incorrect in saying that the US cannot default in the current system?
Am I incorrect in saying that what they use as currency is in reality a debt to be paid?
Am I incorrect in saying that if they paid the debt that no currency would be in existence?

There is zero chance of a default. The real question I have is why did Obama suggest this?

KyussBishop

sin_city wrote: »

Am I incorrect in saying that the US cannot default in the current system?
Am I incorrect in saying that what they use as currency is in reality a debt to be paid?
Am I incorrect in saying that if they paid the debt that no currency would be in existence?

There is zero chance of a default. The real question I have is why did Obama suggest this?

The US can't involuntarily default, only voluntarily (same with any country with the ability to create their own currency), and there are a lot of legal hurdles in the way of a default (including the constitution).

Something like 97% of the currency in circulation in the US is, yes, I believe based upon debt by money loaned from banks - but this includes both public and private debt.

If the US paid down the public debt, there would still be currency in existence, but paying down the debt deflates the private sector, i.e. removes the amount of money that is in the private sector, which can cause economic trouble (particularly at a time like now)

If all debt (public and private) was paid down, there'd be something like 3% of the current stock of money in circulation - but then, you'd never get to that point because it would be so economically disastrous in the first place.

The whole debt-ceiling thing is scaremongering in my view, used to try and justify further public spending cuts.

Rightwing

KyussBishop wrote: »

The US can't involuntarily default, only voluntarily (same with any country with the ability to create their own currency), and there are a lot of legal hurdles in the way of a default (including the constitution).

Something like 97% of the currency in circulation in the US is, yes, I believe based upon debt by money loaned from banks - but this includes both public and private debt.

If the US paid down the public debt, there would still be currency in existence, but paying down the debt deflates the private sector, i.e. removes the amount of money that is in the private sector, which can cause economic trouble (particularly at a time like now)

If all debt (public and private) was paid down, there'd be something like 3% of the current stock of money in circulation - but then, you'd never get to that point because it would be so economically disastrous in the first place.

The whole debt-ceiling thing is scaremongering in my view, used to try and justify further public spending cuts.

I think the debt-celing is good, in the sense that it should be urging fiscal prudence. The debt:gdp ratio in the US is still ok, problem is it's rising quickly. I was a reading a note recently from Fitch, and the rating agencies allow the US greater scope than other countries because the $ is still the reserve currency.

cryptocurrency

Rightwing wrote: »

I think the debt-celing is good, in the sense that it should be urging fiscal prudence. The debt:gdp ratio in the US is still ok, problem is it's rising quickly. I was a reading a note recently from Fitch, and the rating agencies allow the US greater scope than other countries because the $ is still the reserve currency.

And if they were to lose reserve status how do you see that effecting it's GDP/Debt ratio...they are in effect losing it daily as more and more nations tie up direct deals between them.

Rightwing

cryptocurrency wrote: »

And if they were to lose reserve status how do you see that effecting it's GDP/Debt ratio...they are in effect losing it daily as more and more nations tie up direct deals between them.

It would go back to debt to 100% gdp, losing the reserve currency would be a huge blow to them.

cryptocurrency

Its fairly likely to happen, be it a basket of currencies or what ever, it will take away the exorbitant privilege they have had given the right to live without working that much to maintain it.

A Scoundrel

America is not going to lose its reseve currency status.

In fact it's no unhealthy thing to have alternatives. I've long believed that's what the Euro needs to become. But the USD still isn't going anywhere.

JackH14

The US will not default and will not lose its reserve currency position. Which currency would replace it? There is no currency out there strong enough to usurp the USD. And on the issue of default, the US will continue to roll over its debts as it has been doing for years. There is no shortage of willing lenders because of volatility in other currencies and governments. A US government bond is probably the safest investment in the world, maybe besides gold, even with debt levels rising

sin_city

Who says we need a reserve currency Jack? China is already getting ready for a non US dollar world with all the currency swap deals with ever increasing numbers of countries.

I think the FED is buying up all the bonds, most of the them anyway.

Even with the hint of a taper the rates began to increase. They will continue to buy and thus print the dollar into worthlessness.

You will get the return but with much less purchasing power....a la Greenspan

JackH14

A world without a reserve currency would be very volatile and would be playing with fire.

Personally, I think the recent currency swap deals are an attempt to promote the use of renminbi around the world rather than prepare for the collapse of the USD and, knowing the Chinese, they probably want the renminbi to be the new reserve currency and these recent agreements could be the first wave of attempts to cause this.

sin_city

JackH14 wrote: »

A world without a reserve currency would be very volatile and would be playing with fire.

.

Please elaborate

JackH14

First off banks and governments hold large quantities of the USD in reserve because they know that the USD will hold its value over time and will continue to be accepted by everyone due to it being the reserve currency. Other currencies do not have that privilege. That allows foreign governments to protect their currencies against speculative outflows caused by a few major investors who start a chain reaction. A government, using USD, can purchase its own currency and protect its value. This can only be achieved by using the USD because the government needs to have its USD reserves either in cash or in very liquid securities. Only in very large markets are there enough very liquid assets and even simply enough of the currency to allow many governments across the world to hold these significant reserves.

Secondly, without a reserve currency the exchange rates would fluctuate crazily because if banks and governments did not have a large market, the USD market, to sell their reserves even one large bank selling its reserves in a smaller currency would have a major impact on that currency's exchange rate. By having one currency, the reserve currency, which has a large enough market to allow the whole of the world to participate in without a few trades distorting its rates, volatility is reduced.

Pennystockwhiz

I don't think it's a matter of IF the US Gov will default on it's debt it's a matter of WHEN

sin_city

JackH14 wrote: »

First off banks and governments hold large quantities of the USD in reserve because they know that the USD will hold its value over time and will continue to be accepted by everyone due to it being the reserve currency.

ahem, sorry do you mean gold? I mean correct me but aren't they buying more gold than USD these days?

JackH14 wrote: »

Other currencies do not have that privilege.

It only had that privilege because it was originally backed by gold. When people countries starting claiming their gold back with dollars a decade or so after WW2, eventually Nixon was forced to cut the dollar from the gold standard.

Please have a look at this short clip from former French leader Charles De Gaulle

JackH14 wrote: »

Secondly, without a reserve currency the exchange rates would fluctuate crazily because if banks and governments did not have a large market, the USD market, to sell their reserves even one large bank selling its reserves in a smaller currency would have a major impact on that currency's exchange rate. By having one currency, the reserve currency, which has a large enough market to allow the whole of the world to participate in without a few trades distorting its rates, volatility is reduced.

Who says we need exchange rates? Anyway the BRICS countries are looking into moving away from the current dollar system. It will end soon. How did we ever manage to cope before the dollar? We did before and we will again.

andrew

sin_city wrote: »

ahem, sorry do you mean gold? I mean correct me but aren't they buying more gold than USD these days?

I don't think he means gold; banks and financial institutions, as far as I'm aware, don't tend to hold gold. It's a commodity, and commodities tend to be pretty volatile. In addition, they don't earn a guaranteed return in comparison with bonds, which have a fixed return.

Who says we need exchange rates?

There's a concept called the trilemma which does a pretty good job of explaining the various pros and cons of fixed and flexible exchange rates. As we're seeing with the Euro right now, some argue that we need exchange rates because they allow countries to adjust to negative shocks without undergoing painful internal devaluations and extended periods of high unemployment.

smelly sock

begood20000 wrote: »

If the US Government defaults on it's debt will that in turn cause another financial crisis that could result in Irish banks collapsing, hence everyone losing their savings?

Forgive me if the above is a silly question but perhaps there is someone here a little more informed on such matters

no more sky sports in the white house.

JackH14

No I don't mean gold. If I was a bank and I was looking to hold currency reserves purely for stability and safety and not for return, I would be buying the USD. As it has such a large circulation and is backed by the US Federal Reserve it is not prone to exchange rate shocks or excessive volatility. And since every bank must hold a minimum amount of reserves under law and always holds more than that requirement, banks will continue to buy the USD.

Amirani

Pennystockwhiz wrote: »

I don't think it's a matter of IF the US Gov will default on it's debt it's a matter of WHEN

Why do you believe this to be the case out of interest?

Rightwing

andrew wrote: »

I don't think he means gold; banks and financial institutions, as far as I'm aware, don't tend to hold gold. It's a commodity, and commodities tend to be pretty volatile. In addition, they don't earn a guaranteed return in comparison with bonds, which have a fixed return.

.

What happens is that the central banks lease their gold to commercial banks at less than 1% a year. The commercial banks then sell that gold and plow the proceeds into higher-earning investments.

sin_city

@Andrew


Yes they do hold it. It's considered money and has been for many thousands of years.

Actually, gold reserves as a % are not decreasing in central banks. The reserves of the USD are diminishing.

http://www.gold.org/download/pub_archive/pdf/Central_bank_diversification_strategies_paper.pdf

Gold is very stable over a long period of time and holds is purchasing power.

andrew

sin_city wrote: »

@Andrew


Yes they do hold it. It's considered money and has been for many thousands of years.

Actually, gold reserves as a % are not decreasing in central banks. The reserves of the USD are diminishing.

http://www.gold.org/download/pub_archive/pdf/Central_bank_diversification_strategies_paper.pdf

Gold is very stable over a long period of time and holds is purchasing power.

Have you got any data to support the statement that Commercial Banks hold a significant quantity of gold? The pdf you linked supports my point, as it shows that gold reserves have remained completely unchanged in the last 13 years, at 13% of official reserves.

More interesting as you mention (and more on topic for this thread) is the fact that the same chart shows that the share of US dollars in global reserves has fallen from 62% to 54% over the same period. As a result, The Euro, Yen, Pound and 'other currencies' have all seen an increase. The Euro in particular has seen a big increase from 16% to 22%. It'd be interesting to see whether the trend out of the dollar continues given the debt crisis, or whether the debt crisis has had any effect whatsoever. It'd also be interesting to see what effect the European debt crisis, and generally low interest rates have had also.