What Will Happen When The USA Defaults On Its Debt?

Now that the previously unthinkable is almost certain to happen in the next couple of years, what will the consequences be for the world?

Allan Milne Lees

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Image credit: Russia Briefing

The famous economist John Maynard Keynes believed that governments should behave in a fiscally responsible manner. When the economy is thriving, governments should set aside excess funds arising from tax revenues so that during economic downturns this money can be available for stimulus packages without the country incurring extra debt. Today, no Western government acts in a fiscally responsible manner. Due to the need in every system of unqualified representative democracy to bribe citizens in exchange for their votes, governments have ignored Keynes’ strictures and incurred vast quantities of debt in both good times and bad.

The beauty of doing this, from the perspective of the political class, is that ordinary people are generally ignorant of all matters of importance and thus the ever-growing mountain of debt is invisible to them. Ordinary people simply vote for what they believe to be more free ice-cream and so the game continues and the debt mountain continues to grow.

This is a very dangerous game, but as politicians care only about the next election the long term danger is irrelevant to their personal interests as they will likely be long gone before the bill comes due. Moreover, when interest rates are low, debt is an even more attractive option. Voters are like little children: they want immediate gratification without any consequences. They want lower taxes and higher public spending. So politicians use debt to provide the illusion of giving them what they want. Unfortunately, debt accrued during periods of low interest rates becomes a ticking bomb as interest rates rise. When this happens to developing nations like Argentina, the results can be catastrophic and the ultimate outcome is defaulting on the national debt.

When modestly-sized economies hit this unfortunate obstacle in their path to ever-greater borrowing, all manner of clever fiscal tricks are used to reduce the consequences. And as no one regards the Argentine Peso or the Sri Lanka Rupee as a reserve currency essential to the operation of the global trading…

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Allan Milne Lees

Anyone who enjoys my articles here on Medium may be interested in my books Why Democracy Failed and The Praying Ape, both available from Amazon.