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1) seems likelier than 2), 3) is least likely but most interesting. 3) is also the most painful, and maybe the quickest of the three.
So much back and forth about this whole debt ceiling, downgrading, and some of the things we normally talk around here with regards to compe iveness, etc got me thinking a bit...
The status quo on a global scale, as I see it (could be wrong), goes something like this:
The US and the rest of the world outsource and import a lot of stuff from China, due to their compe ive advantage. That kind of trade imbalance means China gets a lot of money coming in. In a free market economy, such money would normally end up in the people's pocket and spur growth in the country (more money means more expansion, more jobs, more salaries, more housing, with more demand and less supply you end up with an increase in pricing and cost of living, etc). But China obviously isn't a free market economy, and they really can't invest all that money in the country because doing so would diminish their compe ive edge. So, what does the Chinese do? The manipulate their currency to keep it low and take most of that money coming in from trade and place it overseas. Obviously, US bonds has been their preferred vehicle. The thing is, if they're waging an economic war with the US (who is their #1 consumer of goods they export), that might be the only vehicle that makes sense for them in order to keep this vicious cycle happening.
On the side of the US, we simply are not compe ive on most of the fields that overlap the Chinese, but we get to live off the Chinese money they'll happily lend to us, simply because it's in their best interest to do so in order to keep that vicious cycle going.
So, with that analysis in mind, there's a couple of scenarios I see playing out:
1) If we don't default, then this cycle continues.
2) We do default, but we deal a reduction in the debt with the Chinese and keep borrowing. Since the Chinese have a major interest in this cycle continuing, they might just take a hit on some of the money and keep lending us like nothing happened, since over time it makes more sense for them for this cycle to stay afloat than to lose their #1 consumer and risk their compe iveness erode.
3) We do default, and we're just not allowed to keep borrowing Chinese money. This actually becomes quite a problem for the Chinese. Not that much on the money hit, but they basically are unable to unload all that money, which now starts to put pressure on their monetary base, and threatens to break the cycle.
Obviously, the US wouldn't come unscathed from scenario 3, but over time, I'm not actually sure it won't be beneficial as far as regaining compe iveness on the world market. I personally see scenario 1 and to an extent 2, to be most likely what's going to happen.
Thoughts?
1) seems likelier than 2), 3) is least likely but most interesting. 3) is also the most painful, and maybe the quickest of the three.
US will NOT default on interest payments (aka hard cold cash) to US bondholders. They're first in line.
The big question is who's 2nd, 3rd, 4th, etc.
As Debt Limit Deadline Draws Closer, We (Sadly) Explain What ‘Default’ Could Mean
http://www.propublica.org/blog/item/...ult-could-mean
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