Ask HN: what would happen if the US defaulted? - mobileman
======
olefoo
Nobody really knows.

We have a good idea that it would be bad (worse than if the .gov hadn't
stepped in to prop up the economy in 2008) but the actual practical
consequences are literally unknowable.

If you're nihilistic you may think that a disruption like this would be a
salutary thing for the United States forcing us into the long overdue
reappraisal of our place in the world and our ability to dictate terms to the
rest of the planet. But the truth of the matter is that our far flung
logistical system means that many of us are more dependent on global trade
than we realise and that a sovereign default on the part of the United States
of America would have repercussions that will affect pretty much everyone on
the planet who has an electrical outlet in their house.

Fucking with the flow of money at that scale will certainly cause chaos and
civil disorder as primary effects, but it will also disable most of the tools
we have to control chaos and civil disorder.

Think of it as being like a power outage, only it's a money outage. Your bank
won't be able to count on getting it's regular operating loans, your employers
bank, the same, various payments into the system for housing vouchers, food
stamps, agricultural subsidies, road construction contracts , all the paper
that keeps our society from collapsing will stop moving. Some of it may
resume, but if enough of the economy is broken...

So best case scenario: economic hardship, generational unemployment, millions
of people displaced from their homes, and the US can wave bye bye to the dream
of hegemonic leadership, economic or military, for the foreseeable future.

Worst case scenario: War. It is traditionally the cause and cure of sovereign
default. And while we (the US of A) are currently fighting multiple colonial
wars (mideast, north africa, south america) which is part of what has spun up
the numbers on the debt; we have not really begun to tap our poulations war
making capabilities, one of the few untapped resources we have left.

~~~
curt
The US won't default unless the President chooses to, there is still plenty of
money to make the interest payments on the debt, it's under 10% of revenue.
All we have to do to balance the budget is go back to what we were spending 8
years ago... Only 8 years ago... That's how much the government has increased.

What would happen is the government would be forced to make cuts in other
areas. There is still enough money for most of the entitlements and the
military but other areas would undergo drastic cuts.

Government Spending to stimulate the economy doesn't work, the best quote is
from FDR's own Treasury Secretary and creator of the New Deal where he said in
front of congress, "We have tried spending money. We are spending more than we
have ever spent before and it does not work... I want to see this country
prosperous. I want to see people get a job. I want to see people get enough to
eat. We have never made good on our promises... I say after eight years of
this Administration we have just as much unemployment as when we started. And
an enormous debt to boot!"

~~~
poppysan
If only it were that easy. The president doesn't have a magic "get things
done" button, unfortunately. He must pass everything through congress. That's
the entire issue with the debt ceiling. If he cannot act - whatever the
action, then we will default.

~~~
curt
Actually he does have the right to prioritize spending in such an instance and
therefore does not need congressional approval. It's a power of the Treasury
Secretary. Clinton did it in '95 during the government shutdown.

------
keyle
It's not likely to happen (sorry for bypassing the answer).

Simply because the international impact would be too big. Too many
international trades rely on the US dollar. Until the Yuan takes over
(speculative(!), if it would, in the next 50 years) the US is pretty much safe
from defaulting.

If it really did, it'd be the end of the global keynesian economies and throw
us back in pre-globalization.

Most economy would pull back from global exposure (that's non-realistic).
Although we're seeing this on a small scale (when France refuses to adopt more
EU policies for example, or when all EU goes pissed at Greece (particularly
Germany)), it just won't happen.

What's going to happen, is massive sweeping under the carpets, "deal with it
later", and a whole bunch of plans to lower debt-creep and keep face publicly.

Think of it as, bumping a massive bug to "next version" in the understanding
that everyone already knows about it, and it's can of worms that would require
too many structural changes, to the point that it would change the nature of
the software itself.

~~~
olefoo
If it weren't for the fact that there is a simple straightforward known
solution to the problem: fixing the revenue side of the equation.

If we reset tax rates to what they were under Bill Clinton the deficit would
be falling, not rising...

[http://en.wikipedia.org/wiki/National_debt_by_U.S._president...](http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms)

Notice when the the numbers start climbing...

Undoing GWB's shenanigans would have us back on the right track tomorrow. But
that is apparently an unthinkable concept in the current political climate.

~~~
yummyfajitas
Both Clinton and Bush barely touched the revenue side of the equation. Revenue
was 18.6% during the Clinton era and 18.0% during the Bush era.

Under Clinton, spending was reduced. Bush reversed most of the Clinton era
budged decrease.

[http://www.deptofnumbers.com/misc/debt-revenue-and-
expenditu...](http://www.deptofnumbers.com/misc/debt-revenue-and-expenditures-
as-a-fraction-of-gdp/)

------
yummyfajitas
Here is the thing I don't understand - why are people acting as if failing to
raise the debt ceiling is the same thing as default?

I.e., I might run up my credit card until I reach my $1500 limit, but I don't
default if the bank fails to raise my credit limit. I only default if I fail
to stop spending more money than I earn and refuse to pay my credit card
bills.

~~~
HSO
Not sure if this is a rhetorical question or not. But the way I understood it
is that it's a question of refinancing federal debt. I.e. the new issues are
needed to pay off existing bond holders, and if treasury was prohibited to do
so, the US would be in default. Have taken my eyes off the markets for the
last few months, though, so "grain of salt" and all that...

~~~
yummyfajitas
I'm asking because I'm genuinely curious. As for requiring new issues to pay
off existing bond holders, why would that be necessary if spending were
reduced or income increased? It seems as if paying off a bond holder with new
debt should be more or less deficit neutral.

I.e., if I pay off $500 of my $1500 credit card bill, my credit limit remains
fixed at $1500 but my debt is now only $1000. I am free to borrow another $500
if I need to.

Is the problem merely that I need to borrow $500 first, raise my debt to $2000
for one day, and then pay off $500 worth of old debt (bringing me back down to
$1500)?

~~~
HSO
"why would that be necessary if spending were reduced or income increased?"

i think that's exactly where the problem is. the debt payments are due soon
and until the republicans turned the federal debt limit into a political
issue, it was being presupposed that it would be raised "automatically" by
congress. now they've turned it into a bargaining tool (similar to what they
did under gingrich in the nineties) and we have "inconsistent time scales", in
that budgeting changes take much longer than the time to next due date.
basically, the republicans hold up the extension "in return" for concessions
by the president on the revenue side (i.e. no tax increases for their
plutocratic clientele) and forcing him to regulate the long-term debt problem
only on the spending side.

but you know what, i shouldn't be talking through my hat. i'm not american,
have only limited understanding of the us budgeting process, and like i've
said have turned my eyes off the markets for a while now. so if anyone knows
better, please, enlighten us :-)

~~~
yummyfajitas
What are the inconsistent time scales? Was it somehow impossible to cut
spending between January and today? How long does it take to reduce spending?

[http://online.wsj.com/article/SB1000142405274870395400457608...](http://online.wsj.com/article/SB10001424052748703954004576089963912388314.html)

~~~
HSO
no point in replying to your questions because they obviously are rhetorical.
good day, sir.

------
ntoshev
The assumption is there is no good reason for the US to default, as it can
always print more dollars and pay debt with them. In contrast, Greece can't
print euros by itself.

~~~
jaydz
The U.S government cannot print money, only the Federal Reserve can. The
government can only get cash from taxes and debt notes, which is why it's
important to raise the debt limit.

~~~
wcoenen
Actually, it is the Department of Treasury that prints and mints new money.
This entity _is_ part of the government, and also manages tax collection etc.

Though you are right that the U.S. government can't print & spend directly.
The printed money has to be brought into circulation by the Federal Reserve,
which lends it out at the Fed rate. Then again, the Federal Reserve's profits
go back to the Treasury so the government can in practice borrow the printed
money from the Fed without interest.

------
jbermudes
Unless I'm mistaken, a default only happens if we don't pay our creditors that
service our debt. For August that's supposed to be around $29billion [1]. We
have more than enough to cover that (the article predicts ~$150 billion in
revenue). Every other expense is legally optional and failing to pay those is
in no legal sense of the word a default.

[1] [http://about.bgov.com/2011/07/12/august-invoices-show-u-s-
tr...](http://about.bgov.com/2011/07/12/august-invoices-show-u-s-
treasury%E2%80%99s-limited-choices/)

------
jacobroufa
I think a proper response to this question would be in the form of another...
What would happen if the US _doesn't_ default? I was raised to think that my
parents tried their damndest to leave this world a better place for their
children. They might have, but their generation sure failed in that respect.
Continuing the charade as if a debt-based economy isn't hurting anyone is just
asking for more trouble down the line. Why don't we, as a people of the world,
do the responsible thing and get rid of the corruption linking politicians,
multinational corporations and banks. The people of the world are suffering
and it ain't getting any easier. I heard Latvia just voted to oust their
parliament because it was as bad as the US government. Corrupt politicians
doing favors for the ones with the "money" and leaving the little guy (the
other 99%) to fend for himself.

[http://english.aljazeera.net/news/europe/2011/07/20117232155...](http://english.aljazeera.net/news/europe/2011/07/2011723215535185126.html)

Also, Ron Paul has some words of wisdom on this topic. He has been saying the
same thing his entire career and people keep calling him crazy. I think it's
about time we listen.

[http://www.bloomberg.com/news/2011-07-22/default-now-or-
suff...](http://www.bloomberg.com/news/2011-07-22/default-now-or-suffer-a-
more-expensive-crisis-later-ron-paul.html)

------
anonymoushn
Is there any reason to expect the US to default? Currently we can easily pay
for our debt service using our tax revenue.

------
jamesaguilar
We will find out what the libertarian ideal of a world without government
entitlements looks like would be my guess.

------
cageface
A related question: what, if anything, are you doing to shield your savings
from a crash in the USD?

I always thought the gold bugs were nuts but if I'd dumped my savings into
gold in 2003 when I was considering it seriously I'd be a very happy man right
now.

------
temphn
There's a good list by Megan Mcardle here.

What people don't get is that increasing US debt is a short term fix. People
are going to stop buying Treasuries and the US is going to default. It's just
a question of whether it happens on Aug. 2 (unlikely) or in a few years (very
likely).

[http://www.theatlantic.com/business/archive/2011/07/getting-...](http://www.theatlantic.com/business/archive/2011/07/getting-
specific-on-spending/242240/)

    
    
      - You just cut the IRS and all the accountants at Treasury, which means that the actual revenue you have to spend is $0.
      - The nation's nuclear arsenal is no longer being watched or maintained
      - The doors of federal prisons have been thrown open, because none of the guards will work without being paid, and the vendors will not deliver food, medical supplies, electricity,etc.
      - The border control stations are entirely unmanned, so anyone who can buy a plane ticket, or stroll across the Mexican border, is entering the country.  All the illegal immigrants currently in detention are released, since we don't have the money to put them on a plane, and we cannot actually simply leave them in a cell without electricity, sanitation, or food to see what happens.
      - All of our troops stationed abroad quickly run out of electricity or fuel.  Many of them are sitting in a desert with billions worth of equipment, and no way to get themselves or their equipment back to the US.
      - Our embassies are no longer operating, which will make things difficult for foreign travellers
      - No federal emergency assistance, or help fighting things like wildfires or floods. Sorry, tornado people!  Sorry, wildfire victims!  Try to live in the northeast next time!
      - Housing projects shut down, and Section 8 vouchers are not paid. Families hit the streets.
      - The money your local school district was expecting at the October 1 commencement of the 2012 fiscal year does not materialize, making it unclear who's going to be teaching your kids without a special property tax assessment.
      - The market for guaranteed student loans plunges into chaos. Hope your kid wasn't going to college this year!
      - The mortgage market evaporates. Hope you didn't need to buy or sell a house!
      - The FDIC and the PBGC suddenly don't have a government backstop for their funds, which has all sorts of interesting implications for your bank account.
      - The TSA shuts down. Yay! But don't worry about terrorist attacks, you TSA-lovers, because air traffic control shut down too.  Hope you don't have a vacation planned in August, much less any work travel.
      - Unemployment money is no longer going to the states, which means that pretty soon, it won't be going to the unemployed people.

~~~
rrrazdan
Are you being serious? Even Germany after WWII hadnt fallen into such anarchy.
The truth is even if the monetary structure fails en-masse(highly unlikely),
society would find a way to function. People will work for food, cigarettes,
coffee.

~~~
DasIch
Germany received a lot of help though. You cannot simply replicate that for
the US.

------
Hyena
Cascading default in state, local and foreign governments along with the end
of a largish chunk of firms, ending with a series of currency unpeggings that
make the end of Bretton Woods look carefully choreographed.

There may be riots in China. Wars are a distinct possibility. Depending on how
the back-end is handled on letters of credit, international trade could grind
to a halt. See riots in China above.

~~~
olefoo
Not just china. Most states are reliant on the feds for transfer payments,
that means 2 million or so households losing their apartments. It means
foodstamps stop or get cut, nationwide. It also will mean reduced police
coverage in many of the larger cities of the Southern US (remember that thing
about blue states being net tax exporters and red states being more dependent
on federal dollars...).

If you were trying to create race riots in the US that's pretty close to the
recipe you'd follow.

~~~
chopsueyar
Race riots or class riots?

------
HSO
to paraphrase larry summers: "post-lehman on steroids"

think what you will of the guy, this is a good description of the most
probable scenario, i think:

<http://www.charlierose.com/view/interview/11777>

(at ~ 4:10)

------
chopsueyar
The US telecom infrastructure would become privatized. Oh, wait.

------
georgieporgie
From what I understand, it wouldn't be as bad as everyone is saying. The US
has been the safe bet for decades. Suddenly, we would no longer be the
international currency, we would be less trustworthy. The international
community would move away from the dollar, maybe to the Yuan, or a mixture of
currencies. We would have a harder time trading, which would spiral us further
down in recession. This wouldn't happen overnight, though.

Internally, I don't think any of the horror stories would happen. Decisions
would have to be made, fast, about what spending to cut. Federal employees
would probable get vouchers for awhile until things get sorted out. Lots of
furloughs, but air traffic controllers and prison guards would most certainly
stay employed.

By the way, this Planet Money on debt was interesting:
[http://www.npr.org/blogs/money/2011/07/20/138518262/the-
tues...](http://www.npr.org/blogs/money/2011/07/20/138518262/the-tuesday-
podcast-how-much-debt-is-too-much) (TL;DL the US is near 100% debt to GDP,
countries historically run into problems when they exceed 90%, but it's not a
guaranteed outcome, and Britain reached debt to GDP rations over 250% after
the war, yet still exists)

