It Is Time to Plan for a Managed U.S. Default

Practically every country has defaulted on its sovereign debt, why, because that is preferable then driving it’s economy into the ground. trying to service a unbearable debt load.
Most of the U.S. debt is held by Asian Central Banks who basically bought this debt to maintain high levels of foreign reserves (to fend off potential currency attacks) and to balance current account surpluses, which allowed their domestic export market to thrive. Now the U.S. needs some help. The other major holder of U.S. Treasures is pensions; they should not be forced into taking such a severe haircut.

A lot of blogs have looked at the current debt levels, and the future obligations and come to the conclusion, in a cash flow model, that the U.S. will never be able to service its debts in 5, 10, or 20 years without massive tax hikes or massive benefit cuts. I agree it looks doubtful, so the alternative is a massive default, currency crisis, and collapse, maybe not.

There have been many sovereign defaults in the past century and the world survived. Since the U.S. is huge it will take a concerted effort of many countries to do several things, refinance debt or re-structure loans, and impose what is politically impossible, benefit cuts and tax hikes or direct spending to service bond holders first.

Only a default crisis will allow critical mass to do what is politically impossible. It won’t be the end of the world, it will restore the basically out of control fiscal imbalance of the U.S.