What happens if the US defaults? Well, our interest rates will go up: no more short-term Treasury bonds at 0.00%. (Yes, the global economy is so bad that people are sometimes loaning the US government money for free. Actually, interest rates on secondary markets, re-selling after the initial sell by the government, have gone negative a few times, which is like saying "I'll loan you a dollar, and you only have to pay me back 98 cents".) Mortgages become more expensive as a result, which means more downward pressure on already-falling house prices, shattering the naive hopes of people hoping for a housing market recovery.
(For non-money nerds: government bonds represent someone loaning money to the government. Interest rates measure two things: (1) The lender's estimate of the risk in lending, and (2) Demand, represented by the lender's desire to lend [by buying the bond]. The higher the risk, the higher the interest rate from the lender. But if the lender really wants to lend [by buying the bond], they may lower their rates to attract borrowers. Government bonds are limited and can be re-sold, so there's a market, and interest rates fluctuate. On the "measuring risk" angle, the interest rates on 2-year Greek government bonds hit 29% last week. That's two-nine with no decimal point.)
(For non-money nerds: government bonds represent someone loaning money to the government. Interest rates measure two things: (1) The lender's estimate of the risk in lending, and (2) Demand, represented by the lender's desire to lend [by buying the bond]. The higher the risk, the higher the interest rate from the lender. But if the lender really wants to lend [by buying the bond], they may lower their rates to attract borrowers. Government bonds are limited and can be re-sold, so there's a market, and interest rates fluctuate. On the "measuring risk" angle, the interest rates on 2-year Greek government bonds hit 29% last week. That's two-nine with no decimal point.)
A lot of concern involves the world panicking because there's then no safe place to put their money: the dollar has been the reserve currency of choice for such a long time. People predict a flight into commodities and gold and silver. Then the price of gold and silver continue to skyrocket, but it hardly seems like that can last, because they don't have any inherent value any more than a dollar does. In fact, I'd argue that in everyday terms, gold bullion is pretty much worthless, because I can't take a bar of gold and go buy a car.
(I guess I could try, with circulating gold coins, but I'd be surprised if anyone would take them.)
Here are the options:
- Gold and silver. Meh. Maybe.
- Oil. This is actually a good bet. All the things that make it an amazing economic input make it a good store of value: fungible, storable, and people want it.
- China. Who trusts China enough to use them as a reserve currency? No one with sense.
- Europe. Nope, the eurozone is disintegrating in slow motion. Once Greece defaults, there's Ireland and Portugal. And then there's Spain. As John Lancaster points out, "The ECB/EU/IMF 'troika' can write a cheque and buy the Greek economy, or the Irish economy or the Portuguese economy. But Spain is the world's twelfth-largest economy, and the ECB [European Central Bank] can't just write a cheque and buy it." And Italy. Did I mention Italy? It's all bad.
- Non-China emerging economies. They're doing well, but they have crises and defaults every 10-20 years, economic inequality where the low end is profoundly bad, and periodic waves of political instability that make America look staid and mature.
Maybe the "safe" thing to do is to spread your bets across all these things. I think, though, that in reality the dollar will continue. For my part, if there's a default and interest rates go up, I'm going to buy Treasury bonds, which along with savings accounts have been a pretty lame investment recently.
A default would create incredible uncertainty. We're demonstrating very loudly to the world exactly how broken our political system has become: specifically, just how insane the Republican Party is, and how much power they're granted both by our system's assumption of good faith, and the Democratic Party's lack of resolve. We continue striking out for new lows, capriciously impeaching a president and then re-electing a thoughtless military adventurist with all the governing skills of a schoolyard bully. I'm honestly not quite sure what's kept the House of Representatives from impeaching Obama just out of spite.
If any reasonable reserve-currency option develops, I'm sure everyone will flock to it. In the meantime, mostly we just look like assholes.
A default would create incredible uncertainty. We're demonstrating very loudly to the world exactly how broken our political system has become: specifically, just how insane the Republican Party is, and how much power they're granted both by our system's assumption of good faith, and the Democratic Party's lack of resolve. We continue striking out for new lows, capriciously impeaching a president and then re-electing a thoughtless military adventurist with all the governing skills of a schoolyard bully. I'm honestly not quite sure what's kept the House of Representatives from impeaching Obama just out of spite.
If any reasonable reserve-currency option develops, I'm sure everyone will flock to it. In the meantime, mostly we just look like assholes.
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