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? asked in Social ScienceEconomics · 7 years ago

What would happen if all countries simultaneously defaulted on their national debt?

I was under the impression that the USA owed all its money to China, but it seems China is in debt as well. So who does everyone owe their money to? The IMF? Where did the IMF get all this money to lend to countries? Wouldn't the world be better off if we all just wiped the slate clean? And another question: how can it be fair for the IMF to change the interest rate of debt after the money has been borrowed? Isn't that a bit like changing the terms of a contract after its been signed?

like it seems to me that it has got to a stage where countries like the USA and UK will never be able to pay off their debt because the interest is so high. So wouldn't it be better just to default on it and start again in 5 years with a clean slate. The UK currently spends more on interest then it does on the NHS and defence budget. That's a ridiculous amount of money to just throw away.

So, while the Chinese are the second largest holder of US debt obligations (Japanese are number one at the moment I believe), there are many other countries, and many US citizens that the US government owes money to as well.

And if Japan is ranked second highest debtor on that list at 189% of GDP. How can they possibly afford to lend money to anyone?

I'm just doing my economics coursework/exam past paper and i'm a little confused. o_O

2 Answers

  • Anonymous
    7 years ago
    Favorite Answer

    A lot of questions! I will try to answer them all.

    1. China is not in debt, companies and consumers save 50% of the GDP per year. Furthermore, the foreign exchange reserves being 3500 billion greatly outweighs the public debt. China is not the only one doing this. Foreign exchange reserves total about 9000 billion.

    2. Also, many institutions hold the money. This is something I've been looking into, apparently, Dutch pension funds hold 900 billion alone. I do not know about other countries with this system (I'm dutch)

    3. The IMF gets their money from member states.

    4. I would love to have the source of that, but it might be that nominal interest rates change, while real interest rates do not.

    5. It would cause huge damage to the reputation of the US obligations, thereby increasing future interest rates. Furthermore, it would result in a huge depression as banks, consumers and other countries would lose huge amounts of equity, increasing the risk of bankruptcies.

    6. high interest rates are a problem, high debt with low interest rates isn't one. Inflation will offset the negative impact.

    7. Again, foreign exchange reserves, They are not included in public debt. Japan has 1300 billion in foreign exchange reserves, a large portion of this is invested in the United States. Japan's debt doesn't matter as much, because their economy as a whole is not in very indebted.. Increasing taxes should work quite well for Japan if it ever faced high interest rates.

    Most of this has to do with currency wars, if you want to understand foreign exchange reserves, I suggest you go on wikipedia, of course, you can always contact me, as I feel that I have a going understanding of the mechanism.

  • 7 years ago

    1. You have to understand the difference between government debt and external debt.

    Government debt is what the government borrowed. Most governments, including the U.S., have borrowed most from their own people. The Chinese are the NOT second largest holder of US debt obligations. They are either the #1 or #2 FOREIGN holder of U.S. debt. Most U.S. debt is held by U.S. institutions. Only 28% is held by holders in other countries


    External debt is what the country as a whole (governments, corporations, and people) owe to other countries (governments, corporations, and people)

    Thus Japan is a net creditor nation: other countries owe Japan more than Japan owes other countries.

    At the same time, the Japanese government debt is over 210% (where did you get 189%) of GDP, but almost all of it is to Japanese people, corporations, etc.


    2. Countries never have to pay off their debt. Countries are presumed to live forever, unlike human beings. For a while, the U.K. actually issued bonds that were explicitly never going to be repaid:



    As long as the country can afford the interest payments:



    and the debt/GDP ratio doesn't get high enough to scare the market into raising interest rates, the only problem with high debt is that offers no cushion - in times of emergency, governments want to be able to borrow more. That means the rest of the time they have to stay well below the limit.

    But otherwise, debt is not a significant economic issue. (That doesn't prevent politicians from making it a political issue.)

    3. Regarding interest rates - you really haven't bothered thinking about this at all.

    A. Bonds are usually for a fixed period. Every year, the U.S. government has to pay off the bonds that mature that year. In order to do so, it borrows money. There is no reason the interest rate on the new bonds should be the same as the interest rate on the bonds it is paying off.

    B. Have you never heard of adjustable rate mortgages? If mortgages can have adjustable rates, why can't other loans? Have you ever looked at your credit card statements? Credit card interest rates can vary from month to month.

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