Entirely independent of fiat/specie, a government can, at any time, default on their debt and choose not to pay any or a portion of it back. Governments tend to choose not to do so because the consequences are significant. Even when governments are unable to fund debt service and have to restructure their debts, they still tend not to write off all of their debts, and agree to pay as much of them as they can because the consequences of default are lower.
With fiat currency specifically, a government that controls its own currency has another option. As bonds come due, instead of reissuing them to get the money to pay back the principal, simply print the money to do so. This is called inflation default, and it’s not especially different from a simple default. Some countries that have done this in the past are no longer able to borrow in their own currency, and so they’re having to borrow in other currencies that they cannot manipulate.
These outcomes are not good, though, and actually end up looking shockingly similar. In either case, just erasing $27T of debt is going to have major consequences, including but not limited to: Nobody wants to loan you more, lack of trust in the US dollar, lack of trust in the administration that defaulted/inflated away debt, poor economic conditions for working Americans, debt/investment crunches for business, etc.
Basically, there’s no free lunch. Debt comes with costs. In moderation, these can be reasonable in the right circumstances, but there’s no trickery that will allow you to spend forever without paying the cost. Wealth is scarce, and money is only a proxy for wealth. Ultimately, the wealth consumed is not available for other things. If you build a bomb and drop it, the same time and resources cannot be used to build a microwave. It doesn’t matter how much money you print, it doesn’t change that.
Governments absolutely can upend the system, but that does not make it wise.
Successful_Cat_4860 on
Yes, completely. But not without consequences. The money the government spends, whether that’s in funded programs or interest payments to creditors, goes out into the economy, and when there’s no corresponding increase in value or productivity for that currency, you get *inflation*.
musing_codger on
It helps to understand the difference between the United States Department of the Treasury and the Federal Reserve System. The Treasury is essentially the government’s bank account. When the U.S. borrows money, the Treasury issues promises to repay — in the form of Treasury Bills, Notes, and Bonds, which vary by maturity but all function as debt. If the Treasury buys back one of these securities, it is retired, and the government’s obligation disappears.
The Federal Reserve is a different entity. It doesn’t borrow money; instead, it creates new bank reserves when it needs funds, effectively expanding the money supply. When the Fed buys a Treasury security, the bond still exists, and the Treasury still owes the money, although most of the interest the Fed earns is returned to the Treasury. For credibility, the Fed is treated as though it were independent, even though it is part of the government framework.
In theory, the Fed could create trillions of new dollars to pay off the national debt. In the very short run, that might work, but over time, it would undermine confidence in the dollar and cause severe inflation. Inflation arises when money grows faster than goods and services, and large-scale monetization would send prices soaring. Completely monetizing the debt would likely result in hyperinflation. Lenders would demand much higher interest rates, annual deficits would persist, and U.S. borrowing would become far more expensive, which would require more money creation. It would be a viscious cycle.vicious
The risks go further: the dollar’s role as the world’s reserve currency depends on global confidence in its value. If that trust were lost, international trade might increasingly shift to euros or other currencies, eroding one of America’s biggest financial advantages. Domestically, wages and savings would be devalued, punishing ordinary citizens.
This process, called “monetizing the debt”, differs little from refusing to repay at all. Debts represent assets to investors, and those investors expect repayment in dollars that hold their value. History shows that countries relying heavily on debt monetization often end up with hyperinflation.
4 Comments
Entirely independent of fiat/specie, a government can, at any time, default on their debt and choose not to pay any or a portion of it back. Governments tend to choose not to do so because the consequences are significant. Even when governments are unable to fund debt service and have to restructure their debts, they still tend not to write off all of their debts, and agree to pay as much of them as they can because the consequences of default are lower.
With fiat currency specifically, a government that controls its own currency has another option. As bonds come due, instead of reissuing them to get the money to pay back the principal, simply print the money to do so. This is called inflation default, and it’s not especially different from a simple default. Some countries that have done this in the past are no longer able to borrow in their own currency, and so they’re having to borrow in other currencies that they cannot manipulate.
As a side note, metal currency doesn’t in practice stop governments from [messing with currency](https://www.reddit.com/r/badeconomics/comments/dzv3w2/aurelian_doesnt_really_understand_fiat_money_and/).
Yes.
Default or Hyperinflation are always possible.
These outcomes are not good, though, and actually end up looking shockingly similar. In either case, just erasing $27T of debt is going to have major consequences, including but not limited to: Nobody wants to loan you more, lack of trust in the US dollar, lack of trust in the administration that defaulted/inflated away debt, poor economic conditions for working Americans, debt/investment crunches for business, etc.
Basically, there’s no free lunch. Debt comes with costs. In moderation, these can be reasonable in the right circumstances, but there’s no trickery that will allow you to spend forever without paying the cost. Wealth is scarce, and money is only a proxy for wealth. Ultimately, the wealth consumed is not available for other things. If you build a bomb and drop it, the same time and resources cannot be used to build a microwave. It doesn’t matter how much money you print, it doesn’t change that.
Governments absolutely can upend the system, but that does not make it wise.
Yes, completely. But not without consequences. The money the government spends, whether that’s in funded programs or interest payments to creditors, goes out into the economy, and when there’s no corresponding increase in value or productivity for that currency, you get *inflation*.
It helps to understand the difference between the United States Department of the Treasury and the Federal Reserve System. The Treasury is essentially the government’s bank account. When the U.S. borrows money, the Treasury issues promises to repay — in the form of Treasury Bills, Notes, and Bonds, which vary by maturity but all function as debt. If the Treasury buys back one of these securities, it is retired, and the government’s obligation disappears.
The Federal Reserve is a different entity. It doesn’t borrow money; instead, it creates new bank reserves when it needs funds, effectively expanding the money supply. When the Fed buys a Treasury security, the bond still exists, and the Treasury still owes the money, although most of the interest the Fed earns is returned to the Treasury. For credibility, the Fed is treated as though it were independent, even though it is part of the government framework.
In theory, the Fed could create trillions of new dollars to pay off the national debt. In the very short run, that might work, but over time, it would undermine confidence in the dollar and cause severe inflation. Inflation arises when money grows faster than goods and services, and large-scale monetization would send prices soaring. Completely monetizing the debt would likely result in hyperinflation. Lenders would demand much higher interest rates, annual deficits would persist, and U.S. borrowing would become far more expensive, which would require more money creation. It would be a viscious cycle.vicious
The risks go further: the dollar’s role as the world’s reserve currency depends on global confidence in its value. If that trust were lost, international trade might increasingly shift to euros or other currencies, eroding one of America’s biggest financial advantages. Domestically, wages and savings would be devalued, punishing ordinary citizens.
This process, called “monetizing the debt”, differs little from refusing to repay at all. Debts represent assets to investors, and those investors expect repayment in dollars that hold their value. History shows that countries relying heavily on debt monetization often end up with hyperinflation.