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What will probably happen in Europe if USA goes in default?

What will probably happen in Europe if USA goes in default?

What will probably happen in Europe if USA goes in default?

This post will be structured in 2 parts:
Who owns the debt by the government
What would the effects be of defaulting
The US defaulting on its debts has both internal and external effects. The total of US government debt is over $ 16.7 trillion. Of that debt, $ 4.8 trillion is owned by governmental agencies.

This includes agencies such as the social security (holds over $2.5 trillion dollars).
Of the public debt, $5.7 trillion is owned by foreign investors.

Keep in mind this is just the actual government debt, effects of a default would be much bigger

Now, what would happen in case of a default? Let’s assume you own a $1000 bond by the US government. You might think it’s just paper, but that’d be wrong. After all, you paid for that paper. Just like an iPod is worth $500 or whatever because that’s what you paid for it. Bonds are means of (safe) investment.

Now, government defaults. You, the owner of the government bond are unsure about whether you will actually ever get your money back, so you’re freaking out. Then some dude comes to you and says “hey, I’ll pay you $500 for that bond!”. You figure “better be sure” and accept it (this 50% depreciation is completely arbitrary).

Now, let’s assume everyone reacts like you do (which is entirely unlikely but let’s assume so for sake of simplicity). Consequence: the value of the government debt drops by 50% for the owners of that debt. Social security loses over $ 1 trillion, other government agencies or internal investors lose a combined $3 trillion.

To put this in perspective, this is roughly $10 000 per American for a 50% drop. Even assuming just a 1% drop, it’d still be $200 for every American out there. Family with 3 kids? Well shucks, you just lost $1000 (in actual assets or in government benefits, this is on a macro level).

Foreign owners of the debt would see the same effects: the value of their assets would fall. China owns $1 trillion in debt, so loses $500 billion. Same with Japan. Both countries have been rumored of being on the verge of an economic crisis, and this would definitely trigger it.

Worldwide, about $3 trillion in assets would disappear. Again, assuming a 50% value drop which, again, is really unlikely.

Now, let’s look at the much major second-order effects. The dollar would drop in value… really hard. Since the dollar is basically the global reserve currency, a lot of foreign companies (be it from India, Bulgaria, Ecuador… you name it) have dollar bank accounts.

Since the dollar would drop in value versus basically every other currency, a lot of those companies would lose a lot of their assets too. Same (and especially) with the banks.
A whole lot of the global economic system is basically based on the stability of the dollar as a reserve currency. The US defaulting would have an effect on the entire global economic system.

I don’t want to sound like a doomsday prophet here, but if shit actually hits the fan a default would likely lead to a domino effect of banks going bankrupt. Remember when that happened with Lehman Brothers and how hard that one single bank going bankrupt shook the global financial system? We avoided a financial collapse at that point by letting the governments bail them out. Thing is, in this scenario the most (powerful) governments wouldn’t be able to bail them out either.

Then you get to the third-order effects. Banks go bankrupt. Before you all start shouting “YEAH, FUCK THE CAPITALISTS!!!”, this means that everyone who has an account with a bank (savings account, investment account or whatever) will lose their money. Companies, but the average family too.

 

***I will stress again that this is all worst-case scenario. Just keep in mind that the EU did everything it could to avoid Greece going bankrupt, and then consider the difference between the Greek economy and the US economy on a global scale. Should give you an idea of how bad it could be. This would be far worse than the Lehman Brothers collapse (many people still don’t realise how close we were to a global collapse of the economic system).

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2 responses

  1. Hi Miep:

    I just received notification that you are now following my blog. It is refreshing to read this blog and find, finally, that someone with a good blog is reading my writing, and not just a person that is trying to promote their blog. Keep up the interesting writing.

    October 24, 2013 at 4:48 am

  2. (To pushinback, nothing wrong with following a lot of blogs to generate interest in your own. Her interests don’t line up with mine that much, but there’s still nothing wrong with that). Me, I just try to share interesting news and talk about events and general interests. That said..)

    On the dollar subject, American did a de facto default when Nixon told Europe that they wouldn’t let them have gold for their dollars anymore. Uh oh. But somebody must’ve made deals because they kept going with the dollar as reserve international currency, one, because it was already in place, and two, because it helped shove the world forward into the one-world-government hole. Three, because of number three, it would make the world clamor for the powers-that-be to save them when the dollar went down, making two a set up for it. Four, All of the above for the purpose of preparing America for its fall.

    I doubt they’ll ever *announce* a default, they’ll just default by sliding it down the devaluation scale.

    Fiat currency, funny money, wealth transfer machine in the hands of the club of rulers, like the Club of Rome. The Federal Reserve, tool in the hands of a handful of bankers, a clique determined to rule over the rest of us. But their end will come. It is prophesied. After they wreak a little havoc first, though.

    Why oh why did the Communist Party and Karl Marx make “a central bank in every nation” a big part of their platform? Who would run a central bank? RIch bankers, that’s who. They already have maneuvered their people in place in government, because governments have a monopoly on force, and they have enough of the people convinced that’s okay. It’s NOT okay.

    That’s one reason I’m glad I left Marxism way behind. Individual freedoms are what count…
    Jesus Christ came to heal the broken hearted, he said, and set the captives free. He whom “The Son” sets free is free indeed!

    October 26, 2013 at 2:25 am

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