Scholarly Comments on Academic Economics

Some Possible Consequences of a U.S. Government Default

by

Abstract

The U.S. government faces a looming fiscal crisis. A default on Treasury securities appears inevitable. The short-run consequences for the economy will be painful. But the long-run consequences, both economic and political, could be beneficial. The most important long-run political benefit would be the imposition of fiscal discipline. The long-run economic benefit would be the alleviation of the future tax liabilities required to service the national debt, irrespective of whether those liabilities are correctly anticipated or not. A historical examination of the state government defaults of the 1840s provides one case study where the long-run consequences were indeed salutary.

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Volume (Issue)
Pages
24-40
Published
JEL classification
G01, H63
Keywords
sovereign debt crisis, default, financial crisis, repudiation, U.S. deflation of 1839-1843
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