Scholarly Comments on Academic Economics

How a Default Might Play Out

by

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.

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Volume (Issue)
Pages
51-59
Published
JEL classification
G01, H63
Keywords
sovereign debt crisis, financial crisis, debt restructuring, negotiated default, unilateral default
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