What happens if nobody can pay anybody back?
December 8, 2009 12:31 PM   Subscribe

What if all the major world economies defaulted on their external debts at once?

Out of curiosity, what if all the large major world economies (say, the economies comprising of 90% of the world's GDP) suddenly defaulted on their external debts (presumably, to each other)? What if they became insolvent? What if every country in the world defaulted and/or became insolvent? Is it even possible?

Thanks in advance for satisfying my curiosity.
posted by Geppp to Law & Government (9 answers total) 2 users marked this as a favorite
 
I'd recommend watching the French film "Le temps du loup", or The Time of the Wolf. It's an end-of-the-world flick where the power goes out, the trains stop running, food becomes scarce, and people slowly descend into savagery. I'd imagine that's what total economic collapse would be like.
posted by Oktober at 12:38 PM on December 8, 2009


You presume too much. Wikipedia:
The US debt in the hands of foreign governments was 25% of the total in 2007, virtually double the 1988 figure of 13%.
Most government debt is not held by other governments.
posted by themel at 12:49 PM on December 8, 2009


Most major currencies are not based on any standard, but on fiat money. In other words, a U.S. dollar's value is relative to other currencies, and is backed by nothing more than the good faith that the U.S. will continue taxing its citizens and printing and recognizing legal tender.

If everyone defaulted at the same time, there would be huge swings in the valuation of currency in several directions at once. What would the value of a dollar be if you could no longer buy a treasury bond (i.e. buying dollars) with any faith that you'd get your money back on the other end of the deal? What would the value of Currency X be if the country issuing Currency X had a shitload of a commodity, like oil, that would always be valuable? A-ha, but oil is traded in dollars and euros, so what's the price of oil?

In reality, this wouldn't happen all at once; you're basically asking what would happen if a meteor hit the planet. But seemingly localized issues can turn global in a hurry.
posted by Cool Papa Bell at 12:51 PM on December 8, 2009


At some point, though, if there was some kind of massive default going on, there would be armed conflict.

That's not the 'given' that you make it out to be. In the hypothetical scenario postulated ("what if all the major economies default?"), it is far more likely that all those major economies would come to an arrangement over 'what to do', rather than go to war over mutually unpaid debts. For example, a major war between the US and China would be far more costly and damaging to either side than finding a way to wipe the slate clean after default.
posted by modernnomad at 12:53 PM on December 8, 2009 [1 favorite]


I don't think the question is well defined, for these reasons:
  • Large countries borrow money denominated in their own currencies. As long as they can still print money, they can't ever default.
  • Large countries have an enormous income tax base. If the US needed to raise an extra $1 trillion tomorrow due to an emergency, it could pass a temporary 10% income surtax and pay it off in like a month.
  • For these reasons, the only thing that would cause a bunch of major countries to default would be a truly enormous disaster (nuclear war, deadly pandemic, etc.). In this case, the people who loan money to governments would probably be willing to compromise for a smaller amount. It would be a minor issue in comparison to the disaster that caused it.

posted by miyabo at 1:09 PM on December 8, 2009


Right then, first off such a default by all sovereign nations wouldn't just impact each other, but would also include a wide variety of private external investors as well e.g., pension funds, private individuals, hedge funds, sovereign wealth funds, the list isn't endless but it would most certainly be long.

So the ripple effect would be felt far and wide, as vast amounts of wealth were instantly nationalised.

If we look back far enough at the history of finance we have seen periods where large number of nations almost simultaneously defaulted, however the world was a much simpler place then in the sense that globalism wasn't that pervasive and effects were highly localised or, at worst, restricted to ones largest trading partners. In Sovereign Defaults and Debt Restructurings: A Historical Overview the MIT Press has a free ebook that reviews such events from 1820 to 2003.

However if such an unprecedentedly large event, simultaneous default, were to happen in current times?

I suspect we'd see a reversion to a barter economy but on an international scale, as each nation as well as business providing goods or services to nations, would demand immediate payment in advance, and more than likely NOT in the form of currency.

So the next question would be the impact of reverting to a barter economy?

Well, the limiting constraint of barter economy is what's called The Double Coincidence of Wants; basically a trade doesn't take place unless both parties want what the other has. Compare to money which is a very useful medium of exchange.

So internally nations that could provide all their citizens needs (not wants by the way) would probably see life as normal, since internally (at least), each sovereign nations could still be honoured internally.

Nations that lacked sufficient natural resources to support their citizens would see sharp reductions in population, and the accompanying civil unrest.

However I suspect all but a few countries would experience sharp declines in living standards, life expectancy and attendant population reductions.

Of course over the long term the world would probably be a more peaceful place, as folks would be spending most of their time just trying to figure out how to eat, and most nations would lack the large amounts of fuel, for example, for international aggression.

interesting question -- thanks for posting!
posted by Mutant at 1:10 PM on December 8, 2009 [2 favorites]


Whoops!

So internally nations that could provide all their citizens needs (not wants by the way) would probably see life as normal, since internally (at least), each sovereign nations currency could still be honoured internally.
posted by Mutant at 1:18 PM on December 8, 2009


At some point, though, if there was some kind of massive default going on, there would be armed conflict.

--

That's not the 'given' that you make it out to be.


I think it is more the 'given' because of the simple fact that we are all humans. A rather cursory glance at history will show you a millennial pattern of recurring armed conflict.

And this end-game scenario is pretty much one of the front-runners among the candidates to cause the next global war to happen. To Mutant's point this scenario would be unprecedentedly large, to say the least.
posted by allkindsoftime at 2:49 AM on December 9, 2009


[Armed conflict is] not the 'given' that you make it out to be.

...a reversion to a barter economy but on an international scale, as each nation ... would demand immediate payment in advance, and more than likely NOT in the form of currency.

I think the armed conflict would almost certainly occur when it becomes clear that the United States "needs" more oil from the Middle East than the producers are willing to barter to us, considering that all the other countries of the world need their uninterrupted supply of oil, too.

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posted by General Tonic at 7:34 AM on December 9, 2009


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