Failing to raise the debt limit
July 10, 2011 9:40 AM Subscribe
What happens if the U.S. defaults?
posted by HabeasCorpus to law & government (13 answers total) 9 users marked this as a favorite
I know the scenario of an actual U.S. default is extremely unlikely. I am aware that realistically, the political game being played right now is theater, and the question really isn't "will we fail to raise the debt ceiling", but rather "by how much will we raise the limit, and with what conditions attached?" Nonetheless, the threat of a government default is interesting to me from a hypothetical standpoint, and I am curious:
What happens if the U.S. fails to raise the debt limit, and defaults on its obligations? (Not a technical default, where we eventually pay back everything we owe, but a real, live, "we're not paying our creditors" default.)
I am not looking for general answers like "it would be a terrible, unparalleled financial crisis." I recognize the severity of such a situation. I am wondering what the process would be: how and why would the economy begin to collapse? What are the consequences of supposedly risk-free treasury obligations losing all their value? How would this translate into problems for the broader economy? I am especially interested in hearing from people with a working knowledge of finance and economics.
I'd also be interested in literature on this subject. Are their any historical parallels that have been studied? (A sovereign default by a nation central to a global economy? My guess is no?) Academic papers written about this hypothetical?