BlueDiamond wrote: LoyalRebel wrote: BlueDiamond wrote:
LoyalRebel wrote:Treasury bonds are risk free, as the fed can print money whenever they want. The only thing that could really cause a default on that type of debt is for the US to openly give the proverbial "finger" to the rest of the world and stop sending them their interest payments.
which is basically what will happen if there is no deal struck.. we would have no money left to pay our obligations.. one of those obligations is interest payments
If you're referring to the debt ceiling, that's different than printing money. The debt ceiling is the limit to what the government can borrow, which is one way that they can pay their obligations without causing (much) inflation.
The Federal Reserve is responsible for printing money. It's a Federal Agency that operates on its own, kind of like the IRS. The board that controls it (Ben Bernake and company) can effectively print as much money as they would like without a vote from congress.
If you read into it, you'll realize how extremely centralized the economic policy making is in the United States, and it's really kind of frightening.
Bottom line: New debt can be issued to repay old debt, but there are other ways of paying obligations if we can't borrow it from China - not that printing money out of thin air is a good thing.
I think the very last line says it all though.. it is a totally unreasonable option on so many levels and would exacerbate the problem
Here's what I think would happen.
Assume an extreme situation and imagine that we printed a large amount of money and paid down a big chunk of our debt. Inflation would spike nations that invested in us would get effectively ripped off (ie. the money they are getting back now is not as valuable as the money they invested in the first place). Our debt would get a lot more expensive, and interest rates would spike. Home ownership and real estate would drop off significantly, which is a big chunk of the economy. Capital investment would be down and jobs would be lost.
I'd say the main reason that America has been able to sustain its export deficit is because of its strong currency. American dollars have historically been the most valuable (thanks to some slick deal making with OPEC, making them agree to only sell oil for US dollars) currency, so it was hard to export merchandise because people in other countries couldn't afford the exchange rate.
If inflation spikes and our currency goes down, exports will rise and the US will start manufacturing again. Yes, life as we know it would change dramatically, but at least the US economy would be would be running on something tangible again.