What If the USA stopped Paying Its Debt

This is one difficult topic, but let's try. The USA has more than 20 trillions of dollars in national debt, that is a 2 followed by 12 zeros, so let's break it down. Let's imagine for instance that you are a millionaire, and all your money is represented in 1000 dollar bills, that adds up to one thousand to make up your million, and if you stack your 1000 bills on top of each other, that stack would be about 4 inches tall (10.16 cm). If you have a thousand of those stacks, you'd be a billionaire, the cash stack would rise to be 333.33 feet tall (101.6 m), which is roughly the height of a 35 story building. Now let's say that you have 1000 of those stacks, then you will be a trillionaire and your cash stack would rise would be 63.14 miles high, which or 9 times the height that a commercial airline flies. Now, this is one trillion and if we multiply that by 20, that is 1263 miles from the surface, this means that we are way passed the Exosphere (6,665 miles from the surface of the earth), yeah, a debt out of this world.

Of course, you just don't wake up one day and find out that you owe a stack of money that would stretch out of the planet, it takes lots of spending. Looking back 50 years ago, the US debt was 348 billion dollars (37% of the GDP) and the first trillion dollars was reached in Ronald Reagan's administration back in 1982, counting for 34% of the GDP. When he left office, the US Debt almost triple (2.9 trillion or 50% of the GDP). Clearly, it was not only his fault, since there is still a big jump to today's 20 trillion, With big tax cuts, spending on dumb ass things like war overseas, and then with economic stimulus packages, it all adds up to where we are now. 

The debt rises because the US government spends more than it can collect in taxes, then it needs to make up the shortfall by selling US treasury bonds to investors and other countries (selling the taxes it has not collected yet, but hoping that will be collected sometime in the future, that is if shit doesn't hit the fan first) promising not to default.

So, What is Default?

When a country defaults on its debt, it is called sovereign default, if the USA were to default, it would essentially stop paying the money it owed to the investors of the US Treasury bonds, if this happens, well, I am sorry to say but, the web has not reached a consensus, this means that nobody really knows what would happen. But some things are going to happen for sure, for example, a global market plunge of biblical proportions, followed by a global rise in interest rates. The impact would be felt by the US creditors (other countries) who are owed the money. Let's check out 5 potential knock-on effects, that will occur in the event of the US defaulting on its obligations.

Depression and Unemployment

The Treasury and the federal reserve, would make their way through banks and eventually blow a hole to the Main Street economy. The unemployment rate would rise and a ton of uncertainty would take center stage. The stock market would suffer, with the stock prices on a free fall as investors fled to other countries for safer investments like gold. The recession would be on the economic horizon, public services disruption since there would be no money to pay salaries or benefits of any kind to federal or military personnel and retirees, social security recipients, Medicare bills, student loans, tax refunds and payments to keep government facilities open. This, of course, would lead to a lot of disruptions and unrest across the American public.

Affect on Business

A US default would significantly raise the cost of doing business since the companies would have to pay higher interest rates on loans and bonds to compete with the higher interest rates of the US Treasury. There would be price increases on goods and services and rising inflation. Business would suffer and as a result, there would be higher unemployment.

US-Dollar Impact

There would be a massive sell of U.S Dollars, an event that would threaten the greenback's status as the world's reserve currency. Prices for everyday commodities and services would go up, and we would be saying goodbye to low mortgage rates. All of the above would affect negatively the buying patterns of the American population, which again would further impact the economy.

Global Market Impacted

The US economy has a far-reaching impact so it would not only be the homeland where the effects would be felt. As you can see (I hope in the image above), foreign nations hold over 40% of the US debt, as you can see, the list is long but China and Japan stand out with over 67% of the 40% (2.24 trillion) and putting this some other way, what we owe Japan (1.17 trillion) is equivalent to 20% of its annual economic output and would shake the Japanese economy for sure.

This specualation is all fascinating, I hear you say, but on what grounds is all this based on?. Well, let's take a real example in another country. Remember Greece?.

Debt Crisis in Greece-Short Discussion

The most recent debt crisis took place there, back in 2015, the country formally defaulted on 1.7 billion payment to the on the IMF in Athens. I know, this is not even close to 1 trillion, but it was still, hugely disruptive. There is a great article about Greece Debt Default that you must read, It will clear this up for you, so click here to read the article from "The Balance".

Let's check out some numbers.

Extreme Poverty Threshold

Back in 2015, 15% of Greeks (about 1.61 million people) earned below 50% of the extreme poverty threshold, when 6 years early, did not exceed 2.2%.

Cost of Goods

The high cost of goods lead to a drop on the net Greece households close to 40% in the same period of time.

Although unemployment has fallen in a substatially, it remains the highest in the EU at 22%.

This is a hard topic to write and read, because at the end, to answer the question: "How realistic is the prospect of the US defaulting on its obligations?. The answer is "Not likely to happen" and the reason for that is that all the US government Debt is denominated in US dollars or US dollar assets, and the US dollar is the underlying asset of almost all currencies in the world, this means for example that, the Mexican Peso is only worth the dollars someone else is willing to pay for it, and the dollar underlies on the American capacity to generate wealth. This was not always like this, money used to be backed up by precious metals like gold and silver but with the "Breton Woods Agreement" of 1944, all major currencies around the world were forced to change its precious-metal based-value system to one of fixed exchange rates. By 1971 there was no turning back and the gold standard was abandoned.

So, we live in a bubble, the mother of all bubbles, the currency bubble, a bubble that will explode someday and will have consecuences of biblical proportions and the whole world knows that, this is why that in the event of the US defaulting on its debt, the world will cut its obligations with the USA to the very zero if necesary, or will grant a time extention of 1000 years if that is what it takes for the USA not to break apart, because if the USA breaks, the whole world will follow.

Now, allow me to quote the world's greatest dumb ass ever, the former Chairman of the FED since 1987 to 2006. 

"The United States can pay any debt it has because it can always print money to do that. So there is zero probability of default"

Alan Greenspan

Thanks for reading and if you are Alan Greenspan, kindly click away, this blog is not for you. There is an special place in hell for people that does the type of shit that you have done.