Sledgehammer's Cycles

Sledgehammer's Cycles
Sledgehammer's Performance and Custom Cycles

Friday, November 9, 2012

Sovereign Debt

There's an interesting guest post at The Gormogons, about the interplay of Obama's military/foreign policy, Japan, and Iran.  Worth a read, but this part stood out:
There have been rumors circulating Dear Leader plans to administratively write off the nation's debt and at the stroke of a pen tell the world we now owe nothing to anyone, thus eliminating the record deficits he's run up.
Seems like a simple solution, the easy way out for those whose poor policy choices have left them in a sea of red ink, drowning in borrowing.  There are lots of those sorts around, and always has been.  Since a sovereign Nation State can always repudiate its debt, why don't they.  I mean, it almost never happens.  How come?

The answer is that repudiating sovereign debt is only an option for governments whose budget is already in balance.  Once they default, who will loan them more money?  And if your budget is balanced, do you really need to default?  And if you're running a big deficit, how do you fund it when nobody will lend to you?

Argentina defaulted ten years ago, and has been increasingly desperate ever since.  Nobody will loan them any more money, foreign investment fled, the peso went into free fall, and (correspondingly) inflation has drained the middle class' life blood.

Now it may be possible that Obama is clueless enough about economics, or such an ideologue that he just doesn't care.  But there would be nothing simple about an American government default, either to other nation's economies or to our own standard of living.

7 comments:

Sevesteen said...

The federal government forced to live within its budget, no matter what? No money to expand endlessly? Where's the downside?

(Yes, I know it isn't really that simple, but I can dream)

Old NFO said...

Yeah, THAT is not going to fly... Just sayin...

Anonymous said...

Well, that's one part. The other part is this: Who owned all those now-worthless bonds?

Pension funds? Businesses? Individuals? They may now be bankrupt, which is gonna do nothing good for the economy.

Other countries? They are gonna be a wee bit unhappy, and may just find ways of expressing it.

The US is still, very temporarily, the largest economy in the world. Pull over, China will be passing shortly. Oh, that huge Chinese electronics company? They're looking for some place they can get cheap, unskilled labor. They are tentatively planning a factory in Detroit.

Bubblehead Les. said...

Well, if your Goal is to End Capitalism and seize the Means of Production, the LAST thing you want is a Functioning Economy. So I can believe it, especially since Harry Reid has decided to change the Senate Rules.

What scares me though, is that this Administration is run by THEORISTS. They think that because half the U.S. population want their Free Cheese forever (or 47% do), that they'll just issue Edicts, and the END of History will Magically Appear!

Just imagine the looks on their Faces when they bring about the French Revolution, not the Soviet.

And the Mob tells Obama and Michelle "To the Guillotine!"

Geodkyt said...

According to the Keynesian-Communists, no problem!

Write off the debt, then print more money to finance ongoing deficits. More government spending = "stimulus", right?

Then, start prosecuting business owners who raise their prices to account for Weimar Republic style inflation for "price gouging" and "profiteering".

What could go wrong? {/snark}

knottedprop said...

Here's hoping that we are about to see uncle Bob from Zim's economic theory put into practice.
The thing is if they do that then everyone else will repusdiate their debt that the USA owns which is of itself quite large. The dollar would become worthless and international trade carried out in dollars would cease overnight.
On the plus side it should destroy the chinese economy and government and throw what's left of the Arab world still being governed sort of sanely into total anarchy.
I also believe that a number of countries would then also nationalize all American owned assetts abroad to get back what is owed to them.

Shepherd K said...

Never underestimate the power of stupid.