A recurrent theme on these threads is that almost all national governments have borrowed money and are in debt, and are continuing to accumulate debt. This is a vicious circle, since money spent paying off interest is money that can't be spent on things such as health care, pensions, education, transport, defence, and so on.
My question is this: what would happen if the governments of every country in the world agreed to repudiate the national debt? They would simply announce that no more payments would be made, and that government revenue would in future be spent on health care, pensions, education, transport, defence, and so on.
I'm not primarily posting about the morality of this idea. Personally, I think people have a responsibility to pay debts they've contracted, although it could be argued that the idea of a "national debt" is a rather strange one, and that particular governments should be held responsible for their specific decisions (so that the responsible figures in the Bush adminstration, not the US taxpayer, would be liable for the debts accrued due to the war in Iraq).
However, the question I'm primarily asking is: if the national debts of all countries were repudiated by their governments, what would be the consequences? For instance, what would happen to the world economy? Would would be the effects on banks and businesses internationally? Who would benefit and who would suffer?
Any thoughts?
Originally posted by TeinosukeThe World economy would come to a virtual standstill. Most national debt are owed to bondholders. The bondholders would riot. Nobody would ever buy another bond. Governments would be forced into a strict pay-go system. Credit would virtually be eliminated as a concept. Wealth would instantly shrink by the full amount of all government debt. The Earth-shattering aftermath would make the Great Depression seem like a walk in the park.
A recurrent theme on these threads is that almost all national governments have borrowed money and are in debt, and are continuing to accumulate debt. This is a vicious circle, since money spent paying off interest is money that can't be spent on things such as health care, pensions, education, transport, defence, and so on.
My question is this: what wo ...[text shortened]... s and businesses internationally? Who would benefit and who would suffer?
Any thoughts?
The economic repercussions would probably be akin to nuclear war.
Okay, maybe I'm exaggerating slightly. But it would be a bad situation.
In moderation, government debt is a fabulous thing. When a government has a good reputation (e.g., the US) its debt is a super-safe instrument that can be used to reduce the risk of savings. For this reason, bonds is where investors flee when the market begins to take a bad turn so debt's return has a negative correlation with the stock market. Investment managers use that relationship to balance portfolios. Banks use it to secure mortgage loans. This helps consumers get good rates on home loans.
Originally posted by FMFIf they were smart enough to emerge from the collapse with money to lend, they'd probably not be foolish enough to start handing it over again to governments that had just repudiated their debts!
Presumably from whoever emerged from the collapse in a position to lend.
Originally posted by TeinosukeYes. Maybe so. But I don't think the foolish-smart dichotomy you allude to applies as inevitably as rational observers like to think. Societies obsessed with debts that they cannot cope with are forgetting that money is not real but is instead a conscious agreement on measuring abstract value. It's unhealthy to treat it as something concrete because it destroys its practical value. This obsession - this mesmerization - is part and parcel of a linear, narrow, managerial approach to economics e.g bankers, technocrats and orthodox "scientific" economists, whose approach is one of continuity which is used as a means to deny failure. I reckon someone, somewhere would soon start the ball rolling again. But maybe you're right. 🙂
If they were smart enough to emerge from the collapse with money to lend, they'd probably not be foolish enough to start handing it over again to governments that had just repudiated their debts!
Originally posted by telerionOf course you're right. But it'd be fun to hear you have a crack at Teinosuke's intriguing OP premise and sh76's apocalyptic vision.
In moderation, government debt is a fabulous thing. When a government has a good reputation (e.g., the US) its debt is a super-safe instrument that can be used to reduce the risk of savings. For this reason, bonds is where investors flee when the market begins to take a bad turn so debt's return has a negative correlation with the stock market. Investmen ...[text shortened]... os. Banks use it to secure mortgage loans. This helps consumers get good rates on home loans.
Originally posted by telerionThat sounds like something Anna Kournikova said on a commercial years ago. She is so hot that I had a hard time paying attention to what she was saying. Something about porfolios and PE ratio or something to that effect.
In moderation, government debt is a fabulous thing. When a government has a good reputation (e.g., the US) its debt is a super-safe instrument that can be used to reduce the risk of savings. For this reason, bonds is where investors flee when the market begins to take a bad turn so debt's return has a negative correlation with the stock market. Investmen ...[text shortened]... os. Banks use it to secure mortgage loans. This helps consumers get good rates on home loans.
Originally posted by FMFWell, I think sh76 is right. Let's assume that it's a sudden event. No warning. No "management of expectations".
Of course you're right. But it'd be fun to hear you have a crack at Teinosuke's intriguing OP premise and sh76's apocalyptic vision.
Unprecedented government intervention all over the planet was needed to rescue the world from a depression when banks' balance sheets were hit with massive erosions in asset values caused by a higher than estimated frequency in mortgage defaults. Of course it was exacerbated greatly by the highly leveraged positions some major institutions took (and could not pay out on).
None of that compares to the US debt alone. If you include both debt held by the public and intragovernmental debt, you have nearly $13 trillion dollars lost value. Every US financial institution would suffer a loss in assets. Firms around the world hold US securities as well. They'd take a crippling hit.
Of course that's just US debt. If every government repudiated it's debt, the problem would be amplified many fold. I don't know exactly what the $US value of all the government debt in the world, but it has got to be enormous.
So getting back to the scenario, as pretty much every financial institution would be crumbling interest rates would skyrocket. Bank runs would occur everywhere so you'd have widespread bank failure. Probably be a great deal of resource hoarding. Basically, on a panic scale of 1-10, this would be an 8, where a 10 would be like if network news broadcast an announcement that a life-ending meteor was gonna hit in about 36 hours.
I would say that interest rates would simply be much higher to match the extent of the suddenness, the risk of repeat, the losses involved, etc and how the bondholders would be compensated if at all in anyway though any other means and how they would all be kept healthy if possible. A lot could be judged in the severity by the rise in the "cost of lending" that institutions would charge in the future to consider taking that risk again... (and the fall in GDP growth rates that follow).
Originally posted by telerionWell at the rate we are going, isn't it only a matter of time before the debt becomes too big to manage?
. Basically, on a panic scale of 1-10, this would be an 8, where a 10 would be like if network news broadcast an announcement that a life-ending meteor was gonna hit in about 36 hours.[/b]
By all means, lets just keep making the meteor bigger and bigger every year!!
Originally posted by whodeyA matter of a very large chunk of time. It would take another two or three decades of financial mismanagement.
Well at the rate we are going, isn't it only a matter of time before the debt becomes too big to manage?
By all means, lets just keep making the meteor bigger and bigger every year!!