[quote=patientrenter]partypup, a default occurs when the person who is supposed to pay does not pay, not when the person who is owed refuses to accept the payments.[/quote]
I understand your point about a default technically not occurring as long as a debtor is making payments. But a debtor can’t make a creditor accept her payments, and we’re not talking about paying a credit card bill from JP Morgan Chase. If Chase didn’t accept my payment, I would undoubtedly file a claim and bring the matter to court to compel payment and have my debt cleared.
However, there is no such authority that can compel one nation to accept another nation’s intentionally-devalued crap currency as payment for a loan made in good faith. I am just speaking in practical terms. If China (or Russia) decides that a dollar that is worth 50% of what it was when the loan was made no longer constitutes sufficient payment for our debts, then they can and will default us, and there’s nothing I can see that would prevent them from doing so. Who would we appeal to? And if there were an appropriate tribunal, what legal grounds would we have to argue against default? “Yeah, we knew we owed a LOT of money, so we basically just decided to run the printing presses all night and give our creditors something worthless. That’s okay, right?” This is no about a debtor who attempts in good faith attempt to repay a debt and is prevented from doing so. This is about a debtor who has decided to pull the ultimate scam on his creditors. So legally and practically speaking, I don’t think the U.S. has the power or the grounds to resist a default.
[quote=patientrenter]Eventually, the dollar will reach a value that satisfies our foreign trade parties. It’s not going to be zero. I just don’t see why a large devaluation has to go all the way to zero. This is not how these things work historically. The US has problems, but it does have good infrastructure, food and water supply, open space, and other basics of a good modern life. At some point that puts a floor under the value of US assets and even the dollar.
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I agree, I can’t imagine the dollar going to zero. But I think a 50-70% devaluation is not unlikely. And I don’t think the dollar would have to go to zero before (a) foreign investment did a U-turn and starting flowing elsewhere (which is already happening now) and (b) the dollar loses its sole reserve currency status. A U.S. without the sole reserve currency and a strong military simply is not a very attractive place for investment and not the ideal safe haven. As one of my friends observed this weekend, it’s now becoming very clear that the U.S. had a phony, illusory economy for the last 3 decades, built on paper and hype. And the only reason it has lasted this long is because we carried the biggest stick and had the only currency in town. When that changes, the U.S. won’t be in a better position than any other “developed” nation, and in fact we actually be in a worse position (at least in the short-to-mid term) because (a) our open space with 300 million (some heavily-armed) will make it difficult to keep order when the machine breaks down, (b) our unprecedented debt will make it harder for us to recover than nations with much less debt and (c) our uniquely heterogeneous population presents significant challenges in allocating limited resources because of competing social interests and cultures.
But hey, I am not predicting the end of the U.S. Far from it. But there’s no way that we will come out of this debacle as a superpower that controls all the chess pieces on the board. This country will simply go dormant for a generation or two while we rebuild, re-orient and re-discover our core values. This will present tremendous opportunities for those born today. Unfortunately, my time horizon is much shorter, and I doubt your or I will live to see this resurgence. So we have to deal with the reality of the coming years and prepare accordingly.
