How a Default Might Play Out

Arnold Kling

Econ Journal Watch, 2012, vol. 9, issue 1, 51-59

Abstract: The U.S. government has made a set of promises that it cannot keep. The current level of outstanding debt is a relatively small part of the problem. Therefore, inflation is unlikely to solve the problem. The promises that are most important to change are Social Security and Medicare. It is easy to assemble a blocking coalition against changes. At some point, investors may see default as a realistic possibility. This can quickly produce a crisis, because it would lead to higher interest rates and would force the government to make tough decisions. The resolution of a crisis would likely take the form of a negotiated default, rather than a unilateral default or a one-party political cave-in.

Keywords: sovereign debt crisis; financial crisis; debt restructuring; negotiated default; unilateral default (search for similar items in EconPapers)
JEL-codes: G01 H63 (search for similar items in EconPapers)
Date: 2012
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