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Can USA have a default?

13/10/2013

Someone asked if US can default, and answered “NOT” because of US military strength, energy production capacity and having a reserve currency. From all these answers i take the military. If you have military advantage upon other countries at level of US, energy may be a problem of price but never an availability. As to the position of US$ as a reserve currency it is a weak argument. The US$ may lose its priority (the process actually started) and still the economy will not default. It will cause devaluation of the US$ against the other currencies but in terms of US$ it will stand behind all its debts. Then who will pay for the exaggerated US debts? The US public, while holding value losing US$s in deposits and savings, or earn US$ as wages or any other form of income. Then the debtors, who will lose part of the real value of their US$ reserves.

If so, why would country like Chine, Japan or any other country want to give new loans to US? Why China in the past when still the problem of the US debt did not reach the today’s impossible level didn’t let to appreciate its currency and make it freely floating? After all the Chinese population would enjoy jump in their living standard with such a policy? Instead they subsidized the US citizens lust for consumption of “luxury items”. (For most of the Chinese almost every product above the basic needs is a luxury). I really don’t have the answer for that. Probably it is connected somehow to US military power mentioned above.

But what if the Chinese decide to change their policy of subsidizing the US consumerism now and with one step? It would create a big economic shock-wave, its consequences is hard to predict. Of course it would happen only as an act of enmity between USA and China. And here we have again the brute military force, which US as a sole world power not always uses with all the prudence. So if to minimize the lose, the creditors of US will have to let the US to descend from the high tree of debt slowly and carefully, (and it is already happening), while all the world is attentively watching the US is creeping down from the very top of the debt heights.

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