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Let’s say the worst case scenario happens. All of America’s creditors demand their money back. And let’s assume none of them are Americans who the US government

Let’s say the worst case scenario happens. All of America’s creditors demand their money back. And let’s assume none of them are Americans who the US government can tax. What actually happens? All the debt is denominated in dollars. The US will simply print dollar bills that match exactly what it owes each creditor and give it to them. And they’re done. But before they do that, they will create a new currency, the USDNew, replace every existing $ with USDNew on a one to one basis, and then pay back their debt in old dollars. And the US will change its constitution to say it doesn’t need to always honor its debt. And the US will say that old$ don’t matter anymore. What will be the impact? New$ will basically become $. The old debt will be completely wiped out for free. All the creditors who decided to fuck with the US will be growth worthless pieces of paper or bits. The US’s reputation will be damaged and the dollar hegemony will be severely weakened, but a lot of people who keep pushing the “debt crisis” narratives aren’t fans of the dollar hegemony to begin with and believe it hurts US exports and competitiveness. So basically in the worst case situation the US would have enjoyed decades of benefits for the dollar hegemony, and will now take the advantages of those benefits to compete inehat will be a slightly more even global economic market. IOW, the US doesn’t get hurt at all.

gizmo686 6y ago
I'd go a step farther (or maybe less far). All the US creditors demand their money back. The US prints new $ to pay them. What is the impact? People now have a bunch of $ sitting under their mattress instead of treasuries. However, those treasuries were already effectively as good as $, since the market for them is highly liquid. If someone wasn't going to spend their wealth when it was in the form of treasuries, their not going to suddenly decide to spend it just because it is in the form of $. The real risk in this scenario is not that people are cashing in their debt; but rather the reason they are doing so. If they are cashing in on their debt because they want to get out of USD all together, the US will have a major problem. But that problem is people moving out of USD; the cashing in of the debt is just a symptom. They could also be doing it because they have stuff they want to spend USD on. Generally speaking, we like it when people spend USD, as that is a sign of a healthy economy. But if people suddenly decided to spend all of the wealth they had been saving in US debt, we would be in a very market. But, again, the problem hear is the overheated market; it doesn't matter that the mechanism is people cashing in on their US debt instead of other savings vehicles. For all practical purposes, the effect of the debt occurs when the government re-spends the money they got as a result of issueing the debt. In exactly the same way fractional reserve banking increases the money supply by issuing debt and having the debtors spend it; treasuries increase the money supply by issuing debt and having the debtor (US government) spend it. The only difference is the debtor has the option just increasing the money supply any way. As a practical matter, US bonds play an important role in the financial system, and it is not clear what would replace them if people suddenly stopped using them.
- lasagnaphil 6y ago
  Good point, your last sentence is what I've been wondering about for some time. From the past decades we have learned that there are clear economical and political disadvantages of having your currency as the world reserve currency - namely the Triffin Dilemma (https://en.wikipedia.org/wiki/Triffin_dilemma https://en.wikipedia.org/wiki/Triffin_dilemma). I think China already knows this from observing the US and might actually be hesitant on making their Yuan as the world reserve currency. Alternatives like Bitcoin might sound cool at first but isn't really a good solution because of its mathematical destiny as a deflationary asset, and that it can't be modulated effectively throughout monetary policy - only math and speculationary greed governs it! In an ideal world a system like the Bancor (that Keynes originally proposed) would be established if all countries have understood this dilemma and tried to come up with a peaceful solution for world trade. But China seems more and more unlikely to abandon their imperialist ambitions especially after Xi Jinping's inauguration (which to be fair, they've learned from previous empires like the Europe and the US). There is quite some possibility that the reserve status of the US dollar will continue to slowly deteriorate, but there wouldn't be an alternative - we would be trading with a mixture of yuans, euros, dollars without any global consensus, and things would surprisingly run as nothing has happened. But then there is also some possibility that there will be a full-out global war between the old and new empires, and at that point the question of world currency and world trade becomes politically redundant.
- makomk 6y ago
  The real risk here is if inflation makes a reappearance, say as a result of people starting to spend all that money floating around. As I understand it the way to deal with that is to raise interest rates, which means that the cost of servicing all that debt suddenly increases for everyone that holds it (both the US government and private individuals). This could be really painful. In this scenario, the problem is the combination of both the large amounts of debt and inflation rearing its head; either one alone would be manageable.
lasagnaphil 6y ago
You're describing this process is going to be incredibly smooth, but you need to consider that what you have written actually has massive political and economical implications... > But before they do that, they will create a new currency, the USDNew, replace every existing $ with USDNew on a one to one basis, and then pay back their debt in old dollars. Wait a minute, are you saying that the US is going to default on their own currency? OK, then be ready for every country to instantly not trust the US dollar anymore, leading to a devastating devaluation of the dollar and import prices skyrocketing off the charts. And guess what: the US, having gone through serious amounts of deindustrialization and being used to rely on foreign imports, now doesn't know how to make things anymore, so expect hyperinflation across all sorts of manufactured goods, many of which are needed in people's daily lives and jobs! You can't just expect national production capacity to quickly catch up to demand; industry takes actual time to rebuild itself. Also, I think people underestimate the fact that the current strength of the US dollar isn't really backed by exports - it's because of the US's massive military / political strength that can crush any small country if they do not obey the ideology of 'their' free market. For example, through the petrodollar system they have been able to force oil (the most important commodity) in the Middle East countries to be only be bought in US dollars, in return for military protection. And any country that tries to deviate from this system will be fucked (for example, Iraq, Iran, and now probably Venezuela, who all got fucked after trying to sell their oil in something other than US dollars). This new petrodollar system has forced US dollar demand to skyrocket throughout the entire world, to replace the previous Bretton Woods system that ran on gold. The verdict is: the US dollar will only devalue if the current neoliberal ruling class of the US decides to forfeit any military intervention and policing throughout the world to establish markets beneficial for them (especially the Middle East). But I think the current ruling class is never going to give up on this, so a political change of hands (through either democratic or non-democratic means) would be necessary. And that's where all the political implications are. > So basically in the worst case situation the US would have enjoyed decades of benefits for the dollar hegemony, and will now take the advantages of those benefits to compete inehat will be a slightly more even global economic market. The problem is the 'take the advantages of' part - if your US dollars become toilet paper, and you do not have the infrastructure to build things, then you really don't have anything to take advantage of (after losing your World Police (TM) status). At least the US still has a shit-ton of natural resources to begin with though. But really, what you should immediately focus after the total devaluation of the US dollar would not be about rebuilding but dealing with widespread unrest and an actual imminent civil war.
rkagerer 6y ago
With such outright shenanigans everyone would lose faith in any US-minted currency and it would become next to worthless. America would be unable to finance any new debt and the government's ability to spend (beyond what it raises in taxes) would collapse.
Udik 6y ago
> America’s creditors demand their money back > the US will say that old$ don’t matter anymore [..] the US will change its constitution to say it doesn’t need to always honor its debt > the creditors who decided to fuck with the US Interesting perspective /s
yellowapple 6y ago
> The US will simply print dollar bills that match exactly what it owes each creditor and give it to them. And in doing so the US will "simply" vaporize its entire economy. > IOW, the US doesn’t get hurt at all. Those of us Americans who are reliant on the dollar holding at least some modicum of value - you know, because that's the currency which we have to use day-to-day - would be hurt pretty substantially. Not all of us have a nice cushion of gold and Bitcoin and real estate to ride out what you're calling a "simple" solution.
User23 6y ago
Wouldn’t even need to do that. The entire treasury debt system is voluntary. Nothing keeps congress from winding it down altogether. Or a compromise like ordering the Fed to set interest rates to 0 and “borrowing” forever at that rate. And then there’s platinum coin shenanigans. Point being this system is a creature of the US Government and given the political will it can set the rules however it likes, even while nominally honoring all present obligations.
jl2718 6y ago
Are there a lot of historical examples of currency reissuance not closely followed by civil war? Maybe I’m only able to recall the worst results.

gizmo686 6y ago

I'd go a step farther (or maybe less far). All the US creditors demand their money back. The US prints new $ to pay them. What is the impact? People now have a bunch of $ sitting under their mattress instead of treasuries. However, those treasuries were already effectively as good as $, since the market for them is highly liquid. If someone wasn't going to spend their wealth when it was in the form of treasuries, their not going to suddenly decide to spend it just because it is in the form of $. The real risk in this scenario is not that people are cashing in their debt; but rather the reason they are doing so. If they are cashing in on their debt because they want to get out of USD all together, the US will have a major problem. But that problem is people moving out of USD; the cashing in of the debt is just a symptom. They could also be doing it because they have stuff they want to spend USD on. Generally speaking, we like it when people spend USD, as that is a sign of a healthy economy. But if people suddenly decided to spend all of the wealth they had been saving in US debt, we would be in a very market. But, again, the problem hear is the overheated market; it doesn't matter that the mechanism is people cashing in on their US debt instead of other savings vehicles. For all practical purposes, the effect of the debt occurs when the government re-spends the money they got as a result of issueing the debt. In exactly the same way fractional reserve banking increases the money supply by issuing debt and having the debtors spend it; treasuries increase the money supply by issuing debt and having the debtor (US government) spend it. The only difference is the debtor has the option just increasing the money supply any way. As a practical matter, US bonds play an important role in the financial system, and it is not clear what would replace them if people suddenly stopped using them.

lasagnaphil 6y ago
Good point, your last sentence is what I've been wondering about for some time. From the past decades we have learned that there are clear economical and political disadvantages of having your currency as the world reserve currency - namely the Triffin Dilemma (https://en.wikipedia.org/wiki/Triffin_dilemma https://en.wikipedia.org/wiki/Triffin_dilemma). I think China already knows this from observing the US and might actually be hesitant on making their Yuan as the world reserve currency. Alternatives like Bitcoin might sound cool at first but isn't really a good solution because of its mathematical destiny as a deflationary asset, and that it can't be modulated effectively throughout monetary policy - only math and speculationary greed governs it! In an ideal world a system like the Bancor (that Keynes originally proposed) would be established if all countries have understood this dilemma and tried to come up with a peaceful solution for world trade. But China seems more and more unlikely to abandon their imperialist ambitions especially after Xi Jinping's inauguration (which to be fair, they've learned from previous empires like the Europe and the US). There is quite some possibility that the reserve status of the US dollar will continue to slowly deteriorate, but there wouldn't be an alternative - we would be trading with a mixture of yuans, euros, dollars without any global consensus, and things would surprisingly run as nothing has happened. But then there is also some possibility that there will be a full-out global war between the old and new empires, and at that point the question of world currency and world trade becomes politically redundant.
makomk 6y ago
The real risk here is if inflation makes a reappearance, say as a result of people starting to spend all that money floating around. As I understand it the way to deal with that is to raise interest rates, which means that the cost of servicing all that debt suddenly increases for everyone that holds it (both the US government and private individuals). This could be really painful. In this scenario, the problem is the combination of both the large amounts of debt and inflation rearing its head; either one alone would be manageable.

lasagnaphil 6y ago

You're describing this process is going to be incredibly smooth, but you need to consider that what you have written actually has massive political and economical implications... > But before they do that, they will create a new currency, the USDNew, replace every existing $ with USDNew on a one to one basis, and then pay back their debt in old dollars. Wait a minute, are you saying that the US is going to default on their own currency? OK, then be ready for every country to instantly not trust the US dollar anymore, leading to a devastating devaluation of the dollar and import prices skyrocketing off the charts. And guess what: the US, having gone through serious amounts of deindustrialization and being used to rely on foreign imports, now doesn't know how to make things anymore, so expect hyperinflation across all sorts of manufactured goods, many of which are needed in people's daily lives and jobs! You can't just expect national production capacity to quickly catch up to demand; industry takes actual time to rebuild itself. Also, I think people underestimate the fact that the current strength of the US dollar isn't really backed by exports - it's because of the US's massive military / political strength that can crush any small country if they do not obey the ideology of 'their' free market. For example, through the petrodollar system they have been able to force oil (the most important commodity) in the Middle East countries to be only be bought in US dollars, in return for military protection. And any country that tries to deviate from this system will be fucked (for example, Iraq, Iran, and now probably Venezuela, who all got fucked after trying to sell their oil in something other than US dollars). This new petrodollar system has forced US dollar demand to skyrocket throughout the entire world, to replace the previous Bretton Woods system that ran on gold. The verdict is: the US dollar will only devalue if the current neoliberal ruling class of the US decides to forfeit any military intervention and policing throughout the world to establish markets beneficial for them (especially the Middle East). But I think the current ruling class is never going to give up on this, so a political change of hands (through either democratic or non-democratic means) would be necessary. And that's where all the political implications are. > So basically in the worst case situation the US would have enjoyed decades of benefits for the dollar hegemony, and will now take the advantages of those benefits to compete inehat will be a slightly more even global economic market. The problem is the 'take the advantages of' part - if your US dollars become toilet paper, and you do not have the infrastructure to build things, then you really don't have anything to take advantage of (after losing your World Police (TM) status). At least the US still has a shit-ton of natural resources to begin with though. But really, what you should immediately focus after the total devaluation of the US dollar would not be about rebuilding but dealing with widespread unrest and an actual imminent civil war.

rkagerer 6y ago

With such outright shenanigans everyone would lose faith in any US-minted currency and it would become next to worthless. America would be unable to finance any new debt and the government's ability to spend (beyond what it raises in taxes) would collapse.

Udik 6y ago

> America’s creditors demand their money back > the US will say that old$ don’t matter anymore [..] the US will change its constitution to say it doesn’t need to always honor its debt > the creditors who decided to fuck with the US Interesting perspective /s

yellowapple 6y ago

> The US will simply print dollar bills that match exactly what it owes each creditor and give it to them. And in doing so the US will "simply" vaporize its entire economy. > IOW, the US doesn’t get hurt at all. Those of us Americans who are reliant on the dollar holding at least some modicum of value - you know, because that's the currency which we have to use day-to-day - would be hurt pretty substantially. Not all of us have a nice cushion of gold and Bitcoin and real estate to ride out what you're calling a "simple" solution.

User23 6y ago

Wouldn’t even need to do that. The entire treasury debt system is voluntary. Nothing keeps congress from winding it down altogether. Or a compromise like ordering the Fed to set interest rates to 0 and “borrowing” forever at that rate. And then there’s platinum coin shenanigans. Point being this system is a creature of the US Government and given the political will it can set the rules however it likes, even while nominally honoring all present obligations.

jl2718 6y ago

Are there a lot of historical examples of currency reissuance not closely followed by civil war? Maybe I’m only able to recall the worst results.