What Happens if the US Defaults on Debt?

[MediumTex]

I've been waiting for someone to raise the consequences of continually printing more Monopoly money to avoid defaulting on trillions of dollars of national debt. How long before we face the long promised spector of taking a wheelbarrow full of paper to the store for a loaf of bread?

No rising wages = no inflationary spiral.

That's the key.

[AgAuMoney]

I've been waiting for someone to raise the consequences of continually printing more Monopoly money to avoid defaulting on trillions of dollars of national debt. How long before we face the long promised spector of taking a wheelbarrow full of paper to the store for a loaf of bread?

No rising wages = no inflationary spiral.

That's a nice thought, but it is not how the real world works.  Compare Zimbabwe as the most recent example I know.

In Zimbabwe wages did not rise even 1/10 as fast as inflation, and many/most people quit working because it was not worth their time.  Some people were/are able to extract additional money (e.g. bribes for police) and some incredibly dedicated people did keep working (e.g. some teachers, medical professionals, etc) and either lived on donations or foreign savings.  One of Cathy's more recent articles where she mentions wages (31 july 2010, http://www.cathybuckle.com/index.php?id=2) alludes a bit to a daily wage of $5 for a civil servant, which might provide essentials but nothing extra.

Even in Wiemar Germany wages did not come close to keeping up with inflation.

Perhaps the idea fails because of foreign savings being converted into local currency (I suspect that was significant in Zimbabwe but have no idea about Germany) or perhaps it is because of state expenditures and the politically connected having the "new money" first.

No matter the reason, the vast majority of people suffer huge declines in purchasing power while the inflationary death spiral occurs, precisely because increasing wages lag the spiral, not cause it.

[MediumTex]

I didn't say wages would keep up with prices.  All I said is that an inflationary spiral requires rising wages, which we don't have right now.

[Gumby]

It seems that a technical default is gaining traction amongst Republicans...

REUTERS: Republican mainstream flirts with brief US default

I'll just say that this kind of political theater isn't very entertaining.

[MediumTex]

It seems that a technical default is gaining traction amongst Republicans...

REUTERS: Republican mainstream flirts with brief US default

I'll just say that this kind of political theater isn't very entertaining.

Remember back in the post-1994 Contract With America era when Gingrich and company let the government shut down for a few days?  Clinton came out of that one without a scratch.

We may be heading for something stupid like that in the bond market and I suspect Obama will also come out of it looking like a hero.  I'm surprised the Republicans in Congress don't see that this pie isn't going to hit anyone's face but theirs.

[sigh]

[Storm]

Yep, between playing chicken with the reserve status of the USD (which is really what a default would mean, loss of reserve status) and wanting to cut Medicare, they are digging their own grave.  I'll tell you one thing, the most represented voting block is age 65+.  You do NOT want to cut their benefits if you want to get re-elected.

[moda0306]

Storm,

Exactly... I'd like to toke the republican will to revamp medicare in the face of the largest retiree population we've ever seen to an unprecedented level of honesty and sacrifice in politics, but I really don't see that as the case.  This is probably political suicide.

It's for this reason, and due to the lack of decent candidates, that I'm 65% sure Obama will get reelected.

I'm not saying I'm convinced a more centrally controlled version of medicare is better than a more consumer-driven one, but just that I don't think either party is being honest with us at this point about the full implications and motives of their ideas.

[Tortoise]

I'm not saying I'm convinced a more centrally controlled version of medicare is better than a more consumer-driven one, but just that I don't think either party is being honest with us at this point about the full implications and motives of their ideas.

There are two parties? They act so much alike on issues that actually matter, I always thought they were the same party

[cowboyhat]

There's Default, which I agree is unlikely, and there's Losing Reserve Status, which I view as inevitable.

Losing Reserve Status is going to leave a mark on US-based savers. In my view the interesting question is when it will happen. I'm with Harry Browne's spirit in thinking that it could be next year or could be in fifty years. There is no way to know when. The investment objective should be to arrange your affairs so that you can take Losing Reserve Status in stride.

[moda0306]

cowboyhat,

To lose reserve status, wouldn't some other currency (gold or euro??) have to swoop in?  What are the mechanics of these countries repelling the dollar as their currency?  I'm not being rhetorical... I can't really work through the logical process of the world simply deciding that they don't want to carry the dollars that we buy their products with anymore.

Wouldn't this process be quite good for U.S. manufacturing and employment?  Just curious.

[Gumby]

There's Default, which I agree is unlikely, and there's Losing Reserve Status, which I view as inevitable.

That inspired me to (re)write a song:

(Set to the tune of Losing My Religion, by R.E.M.)

Oh, gold is better
It's better than a yield
And yields are not high
The lengths that you will go to
to find a low risk yield
Oh no, I've borrowed too much
I set it up

(chorus)
That's me on the Quarter
That's me in the market, I'm
Losing my Reserve status
Trying to keep an I.O.U.
And I don't know if I can do it
Oh no, I've borrowed too much
I haven't borrowed enough
I thought that I heard you counting
I thought that I heard you exchange
I think I thought I saw you try

Every penny
Of every single Dollar I'm
Choosing my obligations
Trying to keep an I.O.U.
Like a hurt lost and inflated fiat, fiat
Oh no, I've borrowed too much
I set it up
Consider this
Consider this
The hint of the century
Consider this
The dip that brought me
To my knees failed
What if all these predictions
Come flailing around
Now I've borrowed too much
I thought that I heard you counting
I thought that I heard you exchange
I think I thought I saw you try

But that was just the greed
That was just the greed

[MediumTex]

Very solid work Gumby.

It would be cool if we could record an album of Weird Al-style gyroscopicinvesting's greatest hits.

In addition to the music, we could do Fake Michael Cuggino as a spoken word piece.

[Wonk]

The IMF has been experimenting with SDRs for the last few years in earnest (even though they've been around a while).  You'd need a supra-national central bank to manage international monetary policy if SDRs replaced the USD as reserve.  As Clive said, it would be a basket of major currencies perhaps weighted by GDP.  It would also likely include gold as a benchmark or reserve (perhaps 20% as in Bretton Woods), but without convertibility.

The privilege of reserve currency is one we've been fighting wars over for 60 years.  To formally lose that status would be a terrible blow to U.S. standard of living, not to mention a major loss of sovereignty to an unaccountable international body.

[Gumby]

Very solid work Gumby.

It would be cool if we could record an album of Weird Al-style gyroscopicinvesting's greatest hits.

In addition to the music, we could do Fake Michael Cuggino as a spoken word piece.

I think Fake Michael Cuggino definitely needs to be done as a hardcore rap music video. Something like this...

[MediumTex]

Very solid work Gumby.

It would be cool if we could record an album of Weird Al-style gyroscopicinvesting's greatest hits.

In addition to the music, we could do Fake Michael Cuggino as a spoken word piece.

I think Fake Michael Cuggino definitely needs to be done as a hardcore rap music video. Something like this...

"I'm on a Boat" is like the gyroscpocinvesting "Stairway to Heaven."

...and when it comes time to lower the lights and let the moments unfurl, we'll have a market wizard version of this.