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Author Topic: If dollars crash to a value of 0, what happens to USA's national debt?  (Read 3016 times)
BenRayfield
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July 12, 2011, 03:59:14 AM
 #1

I don't know much about it, but I've heard that government bonds (printed by USA's government) are traded for dollars (printed by Federal Reserve), and that interest must be paid to Federal Reserve in a never-ending cycle of there always being more money owed than money exists.

If the dollar economy crashes to a value of 0 and that value goes into Bitcoins (and other cryptocurrencies designed to handle whatever problems Bitcoin may have scaling up), then what would happen to USA's national debt?

Would it be paid with the dollars as their value approaches 0 and then paid with other currency in small amounts proportional to the value of dollars?

Or do the government bonds stabilize what the Federal Reserve is allegedly owed based on aproximately the average value of other currencies instead of the value of dollars?

Either way, I want the dollar economy to crash to 0 and be replaced by cryptocurrencies in a smooth transition where the overall economy improves.

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July 12, 2011, 04:19:19 AM
 #2

As the dollar crashes, the bond market for U.S. treasuries will demand higher interest rates to compensate for higher risk of default and the lower purchasing power of the dollar.  This will send the economy into a DEFLATIONARY tailspin like what happened under Chairman Paul Volker Circa 1980 OR the FED will monetize the debt, effectively printing the money to pay off the old loans, triggering hyperinflation.

Hyperinflation is a type of default. The credit markets would react by refusing to lend additional money to the U.S. Treasury. The government would have to subsist on tax revenues only, which it cannot do. The Federal government would be unable to buy the support of the various interest groups that keep it in power. The government would collapse and nobody know what would happen after that.

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BenRayfield
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July 12, 2011, 05:19:50 AM
 #3

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As the dollar crashes, the bond market for U.S. treasuries will demand higher interest rates to compensate for higher risk of default and the lower purchasing power of the dollar.

Yes, but can the Federal Reserve (which isn't federal) change the interest rates for existing debt or only new debt? Which interest rates do they control?

Quote
This will send the economy into a DEFLATIONARY tailspin like what happened under Chairman Paul Volker Circa 1980 OR the FED will monetize the debt, effectively printing the money to pay off the old loans, triggering hyperinflation.

Hyperinflation is a type of default. The credit markets would react by refusing to lend additional money to the U.S. Treasury.

Sounds like a great way to move value into cryptocurrencies without hurting the economy overall and probably improving the economy overall since cryptocurrencies don't have the tax interest from the Federal Reserve.

Quote
The government would have to subsist on tax revenues only, which it cannot do. The Federal government would be unable to buy the support of the various interest groups that keep it in power. The government would collapse and nobody know what would happen after that.

I disagree because government could start using cryptocurrencies, which can be done with secure identity systems or anonymous or both, so there are some forms of cryptocurrency government may be happy to use if the Federal Reserve is on its way out. I think everyone, except the top elite, would benefit from this.



That's about interest. If dollars crash to a value of 0, what happens to the principal of the national debt (the part that's not interest)? What currency, if any, is it based in? If its based in dollars, and dollars have 0 value, then wouldn't the total value of the principal debt be 0? Can we pay off USA's national debt by devaluing dollars to 0 (assuming we can devalue dollars that much) and putting that value into cryptocurrencies?

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piramida
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July 12, 2011, 07:03:24 AM
 #4

That's about interest. If dollars crash to a value of 0, what happens to the principal of the national debt (the part that's not interest)? What currency, if any, is it based in? If its based in dollars, and dollars have 0 value, then wouldn't the total value of the principal debt be 0? Can we pay off USA's national debt by devaluing dollars to 0 (assuming we can devalue dollars that much) and putting that value into cryptocurrencies?

Yes it's nominated in dollars. And no, chinese won't be happy to accept zero money as the payment. They maybe have smaller weapons now, but they can simply send 200-300 million soldiers with wooden sticks on canoes and that'd be enough to take over.

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Sannyasi
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July 12, 2011, 07:30:06 AM
 #5

how about a war instead

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BenRayfield
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July 12, 2011, 07:54:39 AM
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So you're saying that technically it would pay off USA's national debt if the dollar was devalued to 0? And you're also saying that it would be very hard to devalue the dollar to 0 because the rich and powerful don't want that to happen?

Can you summarize how the "government bonds" system works and how china, for example, is involved in that?

Almost everyone is a slave to money. If China wants to threaten war to get out of their agreement to accept whatever value dollars have, then there will be a war, because freedom from slavery is something worth fighting for if there is no peaceful way to have freedom from slavery. The global economy is going to be completely decentralized using cryptocurrencies, if it leads to war or not, because the slaves have seen freedom for the first time and will not give it up easily.

As for the "soldiers with wooden sticks on canoes", a sword beats a lot of men with sticks, and I keep one where I can reach it quickly.

If China goes to war with USA, that would extremely devalue the dollar they seek to make money from, so any kind of war threats from them are probably a bluff.

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piramida
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July 12, 2011, 07:59:30 AM
 #7

No, of course I'm exaggerating, chinese don't need no war, they can just remove US access to it's industrial tit and US will have to beg for it on it's knees. Over 90% of all goods consumed in US are produced in China or India, and there are no manufacturing capability in US left to easily replace that. If China stops it's export, no war would be needed - people would throw the government into the ocean next month.

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Grinder
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July 12, 2011, 08:57:42 AM
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As the dollar crashes, the bond market for U.S. treasuries will demand higher interest rates to compensate for higher risk of default and the lower purchasing power of the dollar.

Yes, but can the Federal Reserve (which isn't federal) change the interest rates for existing debt or only new debt? Which interest rates do they control?
They don't control any of the relevant interest rates, they are determined by the market. When the market rate changes it will only influence new loans. However, the existing loans have to be paid back after a few years and that can only be done by taking up new loans, so eventually it influences all loans.


Sounds like a great way to move value into cryptocurrencies without hurting the economy overall and probably improving the economy overall since cryptocurrencies don't have the tax interest from the Federal Reserve.
I assume you realise that there is absolutely no chance that will happen in the real world.

That's about interest. If dollars crash to a value of 0, what happens to the principal of the national debt (the part that's not interest)? What currency, if any, is it based in? If its based in dollars, and dollars have 0 value, then wouldn't the total value of the principal debt be 0? Can we pay off USA's national debt by devaluing dollars to 0 (assuming we can devalue dollars that much) and putting that value into cryptocurrencies?
If it fell to zero the debt denominated in US dollars would be worthless so there would be nothing to pay off, but of course that will never happen in the real world.

No, of course I'm exaggerating, chinese don't need no war, they can just remove US access to it's industrial tit and US will have to beg for it on it's knees. Over 90% of all goods consumed in US are produced in China or India, and there are no manufacturing capability in US left to easily replace that.
The US imports more goods from Canada than from China, and India is a relatively small trading partner. By far, most of the goods consumed in the US is produced in the US.
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July 12, 2011, 09:05:45 AM
 #9

So you're saying that technically it would pay off USA's national debt if the dollar was devalued to 0? And you're also saying that it would be very hard to devalue the dollar to 0 because the rich and powerful don't want that to happen?
 

The devaluation itself wouldn't pay the debt, the trilllions of dollars will still need to be handed over.

It isn't like this is free either. Defaulting like this costs the powers their money faucet. Hyperinflation may happen, but it won't be because they prefer it.

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Cluster2k
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July 12, 2011, 11:03:04 AM
 #10

The only way US dollars could crash to zero is if the USA chooses to do so, so the question really needs to be reserved.

The USA could pay off the entire debt tomorrow.  Simply get the Federal Reserve to monetize all the debt.  That would crash bond prices (existing loans to the USA) and no one would want to lend money to the USA tomorrow, as they know the nation could wipe out the debt at any moment.  Imports into the USA would skyrocket in price by hundreds or thousands of percent overnight.  The USA would run out of oil within weeks, as the Middle East, Africa and Canada wouldn't fancy selling a real asset (oil) for worthless dollars.

It would be fun all around.

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Littleshop
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July 12, 2011, 12:28:48 PM
 #11

Interestingly right now we get a discount on our debt.  Others in effect are paying to take our debt.  The interest rate we pay them is lower then the inflation rate.  The buyer is paying for the security that we will pay them back with a small amount of interest, vs their money sitting around devaluing (through inflation) with no interest.

If the dollar crashes (not to zero but to half its current value) we get a huge discount on our existing debt but have to pay through the nose for new debt.  So if we STOPPED pulling new debt (which is quite possible) and experienced large inflation, we would get a huge discount on all of that money we borrowed.  It could happen. 

SpaceLord
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July 12, 2011, 07:28:36 PM
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None of the major holders of U.S. debt want the U.S. to default. Heck, the majority of U.S. debt is held domestically, despite the warnings of the danger of China's increased stake.
Jalum
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July 12, 2011, 07:32:27 PM
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I don't know much about it, but

Get an education on the topic and you won't say ridiculous things like...

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Either way, I want the dollar economy to crash to 0 and be replaced by cryptocurrencies in a smooth transition where the overall economy improves.
CurbsideProphet
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July 12, 2011, 07:56:16 PM
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Yes, but can the Federal Reserve (which isn't federal) change the interest rates for existing debt or only new debt? Which interest rates do they control?

You're right in that they're not really "Federal," a cartel of banks would probably be a more accurate term.  The Federal Reserve sets the discount rate, which is currently near zero.  The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window.  These are usually short-term (overnight) loans.

The bond markets set interest rates for debt.  Rates are being kept artifically low because the Fed is currently purchasing Treasuries on the market.  Also called quantitative easing.

What you need to understand is this is a global economy and the US is the behemoth.  There's no such thing as a smooth transition from a crash in the USD to cryptocurrency. 


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giantdragon
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July 12, 2011, 11:39:44 PM
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By far, most of the goods consumed in the US is produced in the US.
As I know even US-made products are manufactured from imported components, only few assembly lines remaining in postindustrial USA.

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