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.
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!"
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.
If we reset tax rates to what they were under Bill Clinton the deficit would be falling, not rising...
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.
Under Clinton, spending was reduced. Bush reversed most of the Clinton era budged decrease.
What we need to do is go back to the Clinton level of spending. The revenue side isn't the problem. If you look at when the rates were changed, revenues on the upper income individuals actually increased. That's how it's always worked. Harding cuts, Kennedy cuts, Reagan cuts, Clinton cuts all increased revenue in relation to the rates changed.
People need to realize increasing tax rates does not mean increased government revenue, decreasing rates does not mean less revenue. Economies don't work like that due to how capital is deployed.
In other words, we'll inflate our way out of this.
We tend to use US debt as a proxy for the risk free rate, which doesn't exist in real life. If US debt were no longer perceived as approximately risk free, we'd just stop using it as a proxy, and come up with some better (say, US treasuries minus half a point).
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.
Even if we can continue paying the interest payments you have something of a symbolic default if the US government is unable to get its fiscal affairs in order. While the US may not technically default there will be a crisis of confidence. The risks of the symbolic default are just as bad as a real default and the ramifications are almost impossible to calculate.
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)?
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 :-)
The problem is a combination of the new issue capital needs to be in the door so the old debt can be paid off (as you mention in your last sentence here) and that more debt needs to be raised each cycle to pay off the interest from the last cycle.
Also, default will not be avoided by spending cuts or tax increases alone. The debt ceiling MUST be raised so the government can borrow more money to pay the bills (I believe you asked a question related to this later on in this thread). Spending cuts and tax increases will help with future ceiling raises, but are currently relevant only as part of the bargaining to raise the debt ceiling.
As US debt is denominated in USD printing money to pay off debt will always be on the table.
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.
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.
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.
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).
- 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.
But doesn't China have to buy treasuries because of their trade imbalance?
And isn't it in our debt holders best interest to avoid total collapse so they can collect interest payments? Isn't owning U.S. debt a way to collect a fraction of our economic output? And if we have Depression level unemployment, there is less tax revenue generated?
Not really. China is increasingly buying other assets, instead of Treasuries: stocks, companies, real estate, etc. In the end, they will own the USA.
In fact this scenario was famously depicted by Warren Buffet in his "Squanderville versus Thriftville" essay: http://www.tradereform.org/2008/03/squanderville_versus_thri... Want some concrete examples?:
The chinese Lenovo acquired the IBM PC division in 2005.
Chinese oil and gas acquisitions: http://blogs.forbes.com/christopherhelman/2011/02/10/watch-o...
China's investments in U.S. up sharply: http://articles.latimes.com/2010/mar/04/business/la-fi-china...
They have no way of dumping USD in the short term without seriously devaluing their own dollars. Not to mention a devaluation of the dollar would mean their export model goes to hell.
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.
If you were trying to create race riots in the US that's pretty close to the recipe you'd follow.
think what you will of the guy, this is a good description of the most probable scenario, i think:
(at ~ 4:10)
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... (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)