What happens when the US can't pay its debt ?

There are 3 options:
1) Honest default by forcing creditors to accept a lower coupon
2) Dishonest default via inflation
3) An Austro-hungary style breakup of the country leaving a rump with all the
debts and imperial bureaucracy.
4) The 4th option isn't really an option at all because it is so ridiculous. Pay back China by slashing spending and increasing taxes and telling the American people they must accept the pain because China must be paid back !

Option one is unlikely, it would mean the end of low interest borrowing for America

Option two must be the most likely but how do you get inflation in an economy that wants to deflate without sparking real inflation rates of 1% a month or more because of a debauched currency ???

Medium term Ben Bernanke has said he will not repeat the 'mistake' of the great depression by tightening monetary policy too soon. This fits nicely with 'inflate away the debt'. So the trend will most likely be an America that gets slowly poorer while China, Asia and South America get richer.

Longer term the US Dollar will loose its reserve currency status. Initially the reserve currency will be shared around with the Euro, Dollar and then maybe an unpegged Yuan all sharing a similar status. Gold, silver, platinum, palladium and oil must also play a big role in this transitional period.

History teaches that an empire can not last long after it enters political and economic decline.

The big problem with the American political system is that it was set up to create a deadlock to stop radical things happening. The problem is that radical things have happened (e.g. setting up of a central bank, removal of the gold standard, the setting up of a large welfare state and military industrial complex, the nation becoming the worlds biggest debtor etc ...). All the system did was to force change to be much slower, more incremental and more stealthy than in other countries. Thus no one is to blame for the terrible mistakes of policy.

But what if radical action is needed ? No party can win a land slide victory and get a mandate to do an option 4 or even an option 1. There will be no American Mrs Thatcher ! The 'end game' must surely be spiralling inflation, poverty and a flight of Americans to Europe, Asia, Canada, Australia and South America - along with their wealth.

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