A US Government Default - The Fed will let it happen in order to save itself.

The US government debt and unfunded liabilities are too large to ever be repaid.  Any serious analyst knows this.  The question is when do these debts become too large to service.

There will be a point that the U.S. government not have enough dollars to fulfill its present obligations.  That is when the US will default.  The Fed will let it default in order to save itself.

Remember there are only two ways the government can collect revenue.  It can tax or it can borrow.  The Federal reserve is the one with the printing press, not the government.  The government must borrow the money by issuing bonds, notes and bills.  The Fed then monetizes the debt by creating the dollars out of thin air to buy the bonds when it engages in quantitative easing.

The debt is constantly being rolled over plus new debt is added to fund the current years deficit.  All of this is possible now because the interest rates demanded by the market are so low.  The Fed has been able to soak up supply without spooking the rest of the market into demanding higher rates.

When the interest rates do rise, the additional nominal interest on the debt in dollars will increase.  This only applies to new debt issuance, but since the government is constantly issuing new and rolled over debt it is a constant concern.

There will come a point when the US will default.  It is inevitable.

That point is when the higher interest payments required by the market in dollar terms exceed the amount of new debt the government can issue.

An example will clarify.  Suppose someone has $100,000 in credit card debt at 1% interest.  He has to pay $1,000 a year to cover the interest burden.  Now suppose like the US government he also runs a deficit.  It doesn't matter what his salary is.  The point is he spends more than he earns.  Say his personal deficit on present items is $5,000.  That plus his interest on his debt is $6,000.  This means in order to stay solvent he has to borrow an additional $6,000.  His new debt is $106,000.

This can continue forever if interest rates stay the same and he is able to borrow unlimited amounts with his line of credit. The problem occurs when rates rise.  In the real world, the act of borrowing more money will in and of itself cause you to have to pay a higher interest rate.

In this example if the credit card issuer were to realize the real default risk and suddenly adjusted his rate to a more realistic number of 6%,  the interest payment on $106,000 would be $6,036.  At that point he cannot continue the can kicking.  The increased dollar cost of interest exceeds the $6,000 he needs make the payments on his already existing debt and yearly deficit.

When will this point occur for the US government?  It will occur when existing debt holders stop buying new debt in larger dollar amounts than the Fed is doing in QE.  Technically the Fed could create the money to buy all the bonds needed to finance the debt and current deficit, but that would certainly be the death of the dollar as a currency.

If one assumes the Fed would like to survive, it needs the dollar to not completely hyperinflate to worthlessness.  The only way to do that would be to not buy the bonds when the market is panicking to unload them.  Let interest rates rise and yes let the US default on its debt.


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