MikeN wrote:The fact that these are dollar-denominated debts doesn't really matter- anymore than if I borrow ten US dollars from you here in Taiwan and agree to pay you back in dollars makes it necessary for the US to back that debt.
The USA can always default, and wouldn't be the first country to do so. But that would immediately destroy confidence in the US dollar, in which case America could forget about being able to buy imports. That would include oil from Saudi Arabia, among other things. So a US default would be as great a disaster for the USA as it would be for those countries that would get stiffed with their suddenly-useless US Treasury Bills that they "invested" in.
The alternative to direct default, as I've said, is inflating away the debt. Pay back everyone, with freshly-printed (or more likely digital) dollars. This is simply a kinder, gentler default. And the holders of those US Treasuries would still be mightily pissed-off, and far less willing to accept US dollars in the future as their reserve currency. That is the reason for holding gold reserves, or other precious metals (silver, platinum, etc). The alchemists have not yet come up with a way to counterfeit gold. But I am NOT advocating a return to the gold standard, but rather pointing-out that individual countries would be wise to stock precious metals as a Plan B for when the USA defaults, because in the ensuing panic nobody will want paper, let alone digital money.
To clarify, 1n 1999/2000 Greenspan was in favour of the surpluses generated under Clinton being used to pay down the national debt, because he was worried that otherwise those crazy liberals would use it for something like paid maternity leave or pre-Kindergarten health/nutrition programs or high-speed rail.
Greenspan is a self-serving prick (like all Randians) who will say whatever he has to in order to hold onto his job. He was stunningly unsuccessful in business and would have wound up as a used-car salesman had he not gotten his big break, appointed by Reagan to run the Fed thanks to his zeal for deregulation and tax cuts.
The US doesn't have to pay off the $16 trillion, and it doesn't owe the derivatives debt floating around out there.
Ah, we get to the crux of the matter. Few people realize that the US taxpayers are, in fact, on the hook not only for the $16 trillion in secret loans made to Wall Street (only revealed due to a one-time audit of the Fed, which only occurred due to a rider attached to a finance bill thanks to a cooperative effort between Ron Paul and Bernie Sanders). You see, the $16 trillion has already been "paid back", an amazing enough trick when the size of the US economy is only $15 trillion in size. The entire TARP program of corporate welfare has also been "paid back." How? Because it wasn't paid back with cash, but rather Wall Street raised the funds by selling their fraudulent derivatives to Fannie and Freddie, the newly nationalized lenders of last resort that since 2009 now belong to US taxpayers. But it gets worse. With Glass-Steagall repealed, Bank of America just recently insured $73 tillion of phony derivatives that they inherited when they took over Countrywide Mortgage. That insurance comes from the FDIC (Federal Deposit Insurance Corporation), owned by the US government. The US government bailout of AIG is just a sideshow by comparison. When, not if, Bank of America goes bust, US taxpayers get the bill.
So to state that more clearly, US taxpayers will have to pay off $73 trillion in bad debts when BOA defaults, and that's just one bank. How does anyone have $73 trillion in bad debt when the US economy is only $15 trillion in total size? That's the magic of derivatives - you simply assign fraudulent values to bad paper. In other words, a Ponzi scheme. Nicer sounding terms to describe this exist, such as "financial innovation" and "leverage." Think of how "Creationism" is now relabeled "Intelligent Design," or "Torture" is "Enhanced Interrogation Techniques," and you've got the idea.
Krugman says it better than I could:(Sorry, long quote):
Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments...
It's funny to see Krugman change. I read one of his books written during the Bush Jr years, "The Great Unraveling." He was scathing about how George Bush was running up debts like a drunken sailor and trying to hide it with accounting tricks. Now Krugman has changed his mind, and it's OK if Obama does it.
Actually, I do agree with Krugman on one thing, the need for the government to spend more money. A LOT more. About $600 trillion more. Or else just default. We might as well get this over with - one way or another, the USA will have to repudiate its debts, it is absolutely impossible for the US economy to grow about 40-fold in the next couple of years, which is what would be needed to pay back these debts the old-fashioned way. But once the USA pulls the trigger and goes bust, it will be greatly diminished as a world power. Which gets back to the original topic of this thread, "Why the world needs America." Quite frankly, the world doesn't. At least, not the America we have now. This is not the America that bravely fought World War II amid much self-sacrifice, this is a spoiled psychopath with an uncontrolled credit-card spending habit.