Post by jacquelope on Jul 9, 2011 12:13:16 GMT -6
This is not a thread glorifying the idea of a total debt default, or the resulting devaluation of the US Dollar. And, much as I desire to, I am not addressing the actual odds of a total debt default: I simply cannot make an accurate prediction on that.
I am only speculating on the consequences of a possible default if Congress doesn't agree on a debt ceiling plan.
So, what are the consequences?
My conclusion, said up front, is that default is never good, but compared to the idea that it's the end of America, the reality may be considered good in a relative sense.
First, let's look at what a default did to Argentina.
The Argentinian default happened in 2002. en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)
Foreign investment fled the country, and so on. Still, unemployment peaked in 2002, and then rapidly declined: www.indexmundi.com/g/g.aspx?c=ar&v=74
The GINI coefficient started decreasing in 2005.
Poverty levels peaked in 2004 and then plummeted to below crisis-years levels: www.indexmundi.com/g/g.aspx?v=69&c=ar&l=en
(Others estimate it at something like 15% as of 2008: en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)#Effects_on_wealth_distribution)
Now, for some myths concerning how bad it'll get in an American default. Like I said, it'll be bad, but not the end of the world, unless nukes go into play... and how likely is such a thing anyway?
1) Theory: Tons of renters and mortgagors = mass homelessness?
Reality: Extremely unlikely (one should never say impossible). In a national debt default situation the police are going to be too busy dealing with criminals if they're going to be on the job at all. We're already seeing police budgets getting cut; in this scenario funding implodes. The sheer number of people looking at eviction will mean lots of people will fight eviction, law enforcement can't keep up, or simply will not deal with them. It's simply not a priority, the cops are human, not robots, and even robots would prioritize. (The masters of money learned that when the cops wouldn't back them against the protestors in Wisconsin.) One or two counties would buck the trend and force mass evictions and the chaos that would cause would deter it from ever repeating itself nationwide. Lesson: land is valuable in a collapse, unless you lack the guns to enforce ownership. Mortgagors / renters = undeterred "squatters". No city or county wants to deal with mass homelessness: best to let them squat.
Instead, what'll happen is landlords, many of whom have mortgages on these properties and do not own them free and clear (residential homes, apartment complexes), will stop paying. The banks who hold the loans will take a headshot in the left eye from the debt default and a headshot through the right eye from all the defaulted mortgagors. Unable to charge the high rents to pay for upkeep, many landlords will be unable to force eviction and may just walk away. Many landlords, lacking the guns to enforce their ownerships, will be scaled back to the home that they live in (note: I, too, would lose properties in that scenario).
The solution, if you feel a default is coming? Renters: repairs = YOYO. Oh and locked doors will be less effective (to put it lightly). Get yourself a book on home repairs and natural pest control, pronto. And just in case: buy a gun. And lots of ammo.
2) Theory: Food will go out of the country to people who will pay more. Mass starvation will ensue.
Reality: Not for long. Americans starving while food from farms is going overseas is a formula for rebellion. It's hard to imagine even the police who are still on the beat, will rise to defend farmers and food companies who pull this. Maybe this works in third world nations, but not America; for one, we have the world's largest population of armed citizens. Armed + hungry = good luck on that food even reaching the shipping docks or the borders. Oh and good luck getting anyone to actually try to transport that food out of the country. What few truckers will agree to do it will also eat a lot of it on the way. A lot of it will "fall" off the truck, too.
Instead, what'll happen is food will become more expensive to transport; home gardens and local farmers markets will rule. Those who live far away from physical sources of food are in trouble. Food prices in general WILL go up. Supply disruptions WILL happen. This part will be terrifying. Worst case scenario: local pockets of starvation, not mass starvation. But if you're the one who's starving, that means little consolation.
Solution, if you feel a default is coming: live near a farmer. Make friends with farmers. Start your own garden now. Get ready to barter. Hyperinflation is not a likely scenario in a default situation, but if it is, those who grow the fruits have money growing on trees. Plus, anyone who believes a default means that food will be sold overseas instead of to Americans, should own a garden and fruit trees so that they can profit.
3) Theory: The odds of an attack on Americans will increase.
Reality: Yeah, that has credibility. The military will have less funding as a result of a default and America has a lot of enemies out there. They'll primarily come in from Mexico and through Canada, meaning drug lords residing in Mexico (and down south) will expand their network of terror into the southern regions of the U.S. and terrorists will try to enter Canada to come to the U.S., expecting weakened security along the U.S.-Canada border.
The problem for Mexico is there's a LOT of armed people down south; an invasion would go both ways. Mexico gets lots of guns from America, now they'd be facing the people who make and stockpile those guns coming back at them. Remember that part about America being the most well-armed, and the cops being a bit busy and underfunded? Mexico is on their own and if their drug lords take advantage of America's economic chaos and start storming across the border, America will not ever forget the loss of life and chaos of the suddenly escalated drug lord crisis; but it will end in absolute catastrophe for Mexico.
Solution: get armed, or move as far AWAY from the Mexican border as you can. And move out of big cities, because random ruffians, rioters and terrorists alike, love cities.
4) Theory: People will not help others in need. It's every man for himself.
Reality: Partially true. Tribalism is an issue in America.
Solution: Form communities and co-ops. Going it alone in a post-default America is not good for your health.
On the upside?
Once stability returns, America will go right back to being one of the most productive working populations in the world. With the dollar having lost so much value, investments will return and so will tourists... especially tourists. The stellar convergence of the cheap dollar and a historically highly productive workforce will make American-made goods and services the most wanted in the world. Chinese citizens may be looking at floods of Chinese flags "Made in the USA". Unemployed and desperately poor Americans may need to bone up on their Mandarin but they'll be taking those banking support jobs from Chinese workers: because their labor will be so much cheaper. Hey, it beats being out of work for years on end! Got a knack of engineering? Well now those jobs will be coming back, too.
Why? I speculate that because while nations like China can try to keep pegging their currency to the dollar, in a default-led collapse and the resulting American miserable inflation scenario, China risks inflating itself into oblivion to keep up the peg. Brazil, too. India won't try to go there either. It's too much inflation for China (or anyone else) to maintain the peg. Their currency will rise and American labor will become cheaper. We're already starting to see some offshoring being curtailed by rising foreign wage costs. This, even the pro-offshoring group Von Mises Foundation grudgingly admits (with a whole bunch of sour grapes caveats thrown in). "While presenting a good opportunity for the American professionals, the labor shortage will negatively affect US companies and the economy overall." (Of course, this argument assumes that better opportunities for American professionals is less important than the effects on US companies... which just totally disregards that the economy is built mostly by the workers/professionals. When they're healthy, businesses necessarily thrive!)
What this also means is that imports will be very expensive. But then I speculate that America will be forced to go back to making more things domestically. Innovations and emerging technology will be forced into the open because the high cost of imports will force people to find cheaper ways to get things done - and cheaper, in our eyes and in the eyes of the entire world, will be "Made in the USA".
I am only speculating on the consequences of a possible default if Congress doesn't agree on a debt ceiling plan.
So, what are the consequences?
My conclusion, said up front, is that default is never good, but compared to the idea that it's the end of America, the reality may be considered good in a relative sense.
First, let's look at what a default did to Argentina.
The Argentinian default happened in 2002. en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)
Foreign investment fled the country, and so on. Still, unemployment peaked in 2002, and then rapidly declined: www.indexmundi.com/g/g.aspx?c=ar&v=74
The GINI coefficient started decreasing in 2005.
Poverty levels peaked in 2004 and then plummeted to below crisis-years levels: www.indexmundi.com/g/g.aspx?v=69&c=ar&l=en
(Others estimate it at something like 15% as of 2008: en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)#Effects_on_wealth_distribution)
Now, for some myths concerning how bad it'll get in an American default. Like I said, it'll be bad, but not the end of the world, unless nukes go into play... and how likely is such a thing anyway?
1) Theory: Tons of renters and mortgagors = mass homelessness?
Reality: Extremely unlikely (one should never say impossible). In a national debt default situation the police are going to be too busy dealing with criminals if they're going to be on the job at all. We're already seeing police budgets getting cut; in this scenario funding implodes. The sheer number of people looking at eviction will mean lots of people will fight eviction, law enforcement can't keep up, or simply will not deal with them. It's simply not a priority, the cops are human, not robots, and even robots would prioritize. (The masters of money learned that when the cops wouldn't back them against the protestors in Wisconsin.) One or two counties would buck the trend and force mass evictions and the chaos that would cause would deter it from ever repeating itself nationwide. Lesson: land is valuable in a collapse, unless you lack the guns to enforce ownership. Mortgagors / renters = undeterred "squatters". No city or county wants to deal with mass homelessness: best to let them squat.
Instead, what'll happen is landlords, many of whom have mortgages on these properties and do not own them free and clear (residential homes, apartment complexes), will stop paying. The banks who hold the loans will take a headshot in the left eye from the debt default and a headshot through the right eye from all the defaulted mortgagors. Unable to charge the high rents to pay for upkeep, many landlords will be unable to force eviction and may just walk away. Many landlords, lacking the guns to enforce their ownerships, will be scaled back to the home that they live in (note: I, too, would lose properties in that scenario).
The solution, if you feel a default is coming? Renters: repairs = YOYO. Oh and locked doors will be less effective (to put it lightly). Get yourself a book on home repairs and natural pest control, pronto. And just in case: buy a gun. And lots of ammo.
2) Theory: Food will go out of the country to people who will pay more. Mass starvation will ensue.
Reality: Not for long. Americans starving while food from farms is going overseas is a formula for rebellion. It's hard to imagine even the police who are still on the beat, will rise to defend farmers and food companies who pull this. Maybe this works in third world nations, but not America; for one, we have the world's largest population of armed citizens. Armed + hungry = good luck on that food even reaching the shipping docks or the borders. Oh and good luck getting anyone to actually try to transport that food out of the country. What few truckers will agree to do it will also eat a lot of it on the way. A lot of it will "fall" off the truck, too.
Instead, what'll happen is food will become more expensive to transport; home gardens and local farmers markets will rule. Those who live far away from physical sources of food are in trouble. Food prices in general WILL go up. Supply disruptions WILL happen. This part will be terrifying. Worst case scenario: local pockets of starvation, not mass starvation. But if you're the one who's starving, that means little consolation.
Solution, if you feel a default is coming: live near a farmer. Make friends with farmers. Start your own garden now. Get ready to barter. Hyperinflation is not a likely scenario in a default situation, but if it is, those who grow the fruits have money growing on trees. Plus, anyone who believes a default means that food will be sold overseas instead of to Americans, should own a garden and fruit trees so that they can profit.
3) Theory: The odds of an attack on Americans will increase.
Reality: Yeah, that has credibility. The military will have less funding as a result of a default and America has a lot of enemies out there. They'll primarily come in from Mexico and through Canada, meaning drug lords residing in Mexico (and down south) will expand their network of terror into the southern regions of the U.S. and terrorists will try to enter Canada to come to the U.S., expecting weakened security along the U.S.-Canada border.
The problem for Mexico is there's a LOT of armed people down south; an invasion would go both ways. Mexico gets lots of guns from America, now they'd be facing the people who make and stockpile those guns coming back at them. Remember that part about America being the most well-armed, and the cops being a bit busy and underfunded? Mexico is on their own and if their drug lords take advantage of America's economic chaos and start storming across the border, America will not ever forget the loss of life and chaos of the suddenly escalated drug lord crisis; but it will end in absolute catastrophe for Mexico.
Solution: get armed, or move as far AWAY from the Mexican border as you can. And move out of big cities, because random ruffians, rioters and terrorists alike, love cities.
4) Theory: People will not help others in need. It's every man for himself.
Reality: Partially true. Tribalism is an issue in America.
Solution: Form communities and co-ops. Going it alone in a post-default America is not good for your health.
On the upside?
Once stability returns, America will go right back to being one of the most productive working populations in the world. With the dollar having lost so much value, investments will return and so will tourists... especially tourists. The stellar convergence of the cheap dollar and a historically highly productive workforce will make American-made goods and services the most wanted in the world. Chinese citizens may be looking at floods of Chinese flags "Made in the USA". Unemployed and desperately poor Americans may need to bone up on their Mandarin but they'll be taking those banking support jobs from Chinese workers: because their labor will be so much cheaper. Hey, it beats being out of work for years on end! Got a knack of engineering? Well now those jobs will be coming back, too.
Why? I speculate that because while nations like China can try to keep pegging their currency to the dollar, in a default-led collapse and the resulting American miserable inflation scenario, China risks inflating itself into oblivion to keep up the peg. Brazil, too. India won't try to go there either. It's too much inflation for China (or anyone else) to maintain the peg. Their currency will rise and American labor will become cheaper. We're already starting to see some offshoring being curtailed by rising foreign wage costs. This, even the pro-offshoring group Von Mises Foundation grudgingly admits (with a whole bunch of sour grapes caveats thrown in). "While presenting a good opportunity for the American professionals, the labor shortage will negatively affect US companies and the economy overall." (Of course, this argument assumes that better opportunities for American professionals is less important than the effects on US companies... which just totally disregards that the economy is built mostly by the workers/professionals. When they're healthy, businesses necessarily thrive!)
What this also means is that imports will be very expensive. But then I speculate that America will be forced to go back to making more things domestically. Innovations and emerging technology will be forced into the open because the high cost of imports will force people to find cheaper ways to get things done - and cheaper, in our eyes and in the eyes of the entire world, will be "Made in the USA".