Re: OT National Bankruptcy?

rvfulltime wrote:
Carl A. in FL wrote:
"rvfulltime" <rvfulltime.nospaam@xxxxxxxxxxxxxxx> wrote in message news:YaITk.134$9k5.189@xxxxxxxxxxxxxxxxxxxx
Janet Wilder wrote:
Since there are so many people here that know lots about politics and government, I have this question.

The government is giving away billions of dollars to bail out businesses. All this money is being borrowed. What happens if the country can't repay its debts and it goes bankrupt?

What do the creditors take? Can they come over and assume sovereignty over, say, Brooklyn?

What kind of collateral does our government use to back up its loans? It can't just be the gold in Fort Knox and the silver at the Federal Reserve? I think we have far out borrowed those amounts.

I'm really serious. I Googled it but could not find an answer.


Ok, since this is a serious question, I'll give a serious answer. My qualifications to answer the question are a B.A. in economics, plus owning a small business for over 25 years. You hold a number of misconceptions that a lot of people hold. That's not intended to be criticism, it's just the result of not having been educated in certain subjects.

I'm aware that the U.S. or the country is a lot more than just it's government, so in this discussion when I refer to the U.S. or to the country, I mean the federal government.

If a country cannot pay it's debts then that means that a country cannot borrow money. Most federal debt gets repaid by borrowing new money, i.e. issuing more debt. The U.S. is nowhere close to not being able to borrow money, i.e. not being close to not paying it's debts.

What really counts when discussing federal budget deficits and debt is the ratio of it to the GDP (Gross Domestic Product). The current or projected deficit is smaller than what it was in the late 70s or early 80s and a lot smaller than in the 1940s. The volume of the current debt is not a big problem. A much bigger financial problem is unfunded liabilities, such as social security and medicare.

In addition, the government is NOT giving away billions to bailout businesses (AIG, banks, etc.), they are actually getting something in return. In some cases they get stock in the company (yes this is socialism), and in other cases they get various debt securities that are deflated in value. It is unlikely that this money will end up just disappearing, and it is possible that the government may make a profit.

An important note here. Despite all the reports by the news media, most U.S. debt is held by Americans not foreigners.

Now to answer your "what if"... If the U.S. couldn't pay it's creditors, which also means that it couldn't borrow any money, then it would work similar to what has happened with other local governmental agencies that have declared bankruptcy; there would be negotiations with creditor to accept less than full value for their bonds. If this were in fact to happen, there would be a world wide economic collapse much worse than the Great Depression. We might even resort to a barter economy with hard gold (coins) as the real money.

There is no collateral to back up the debt that the U.S. issues other than the "full faith and credit" of the government. This includes it's ability to tax it's citizens to raise the revenues to pay back any debt.

I hope this answers your questions.



Thank you for a very intelligent post and excellent insights.

Just one minor addition:

When the government can't (or won't) borrow but prints up paper instead, then inflation is the result.

During the Carter years money wasn't available for borrowing at rates as high as >20%.

Instead, the printing presses ran overtime and we got 12+% inflation.

That, quite frankly, is what I fear the most since it erodes savings and kills the wealth of people who live on a fixed income and savings.

Indeed, even traditional pension plans tend to not keep up with inflation, and the pensioners suffer an erosion of their standard of living.

I hope you understand that "running the printing presses" and "prints up paper" is really a euphemism. The U.S. government has never literally done that, unlike many Latin American and African countries. The supply of money is not controlled by the executive branch of government, it is affected and somewhat controlled by the Federal Reserve Board. It is their actions regarding the discount rate, reserve requirement, and other policies that affect the money supply. You are correct that money supply that increases too rapidly will result in inflation.

It is also important to note that our domestic economy is much more international that it was 30 years ago and that international factors can also affect inflation. Plus, it is a long standing policy of the federal government that achieving full employment (3%-4% unemployment) has a higher short term policy priority over achieving low inflation. There is no doubt in my mind that right now keeping people employed has a much higher priority relatively speaking when compared to the policies promoted over the last 25 years, thanks to the financial/lending crisis.


Nuh uh.. Govmnt Bonds is 'paper'.. [if you want em in paper]

That's the paper I was talking about...

--
Ol' Gar and Mahoney... Workin' on the Hot-Rod Bus.. under the bridge.. down by the river..

http://coltonmotorexpress.blogspot.com/
.

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