[quote=patientrenter]4plex, my point was that the US govt can ALWAYS repay its dollar-denominated debt, so the chance that it won’t seems vanishingly small to me.
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P Renter, I understand what you’re saying in principle, but here’s my question: what happens when the dollar becomes so devalued that our creditors refuse to accept it? In such a scenario, the US gov’t would NOT be able to repay its dollar-denominated debt. Imagine that a debtor with insanely high debts has consistently been paying a creditor with a currency of real value. Now, imagine the debtor discovers that he no longer has access to a currency holding real value and instead begins to offer his creditors sea shells as payment. Yes, the debtor is technically attempting repayment. But if the payments aren’t accepted, a default ensues. The facts in this analogy aren’t entirely similar (since we aren’t converting our dollars into another form of payment like sea shells), but the concept is the same. A debtor cannot repay a debt if her payments are rejected. I think you are assuming that as long as a debtor presents something that she considers to be of “value”, his creditor is obligated to accept such payment. I think this is a false assumption.
When (not if) the dollar loses its status as the sole reserve currency, I think we may be looking at the possibility that severely devalued US dollars will eventually not be accepted as payment for imports or any forms of foreign debt because the dollars that a creditor accepts today may be worth even less tomorrow! Instead, the US will be required to come up with stronger currency (or gold) to repay its debts. This would be a common sense move for any US creditor under the circumstances. And that’s when things will start to get very interesting.
By next summer, I think there are going to be a whole lot of people who wished they had gotten busy adding gold to their portfolio. It could be going parabolic within months. Of course, precious metals will eventually turn into another bubble in a few years, but the prudent investor will use their dollar profits to do what the Chinese have been doing for the past year: buy hard assets like land, food, guns, ammo, medicine, equipment, seeds, etc.
