Wednesday, 12 November 2008

Throwing Good Money After Bad - Part II

Part I, if you're interested.

If not, well here's the summary "I'm going to make a prediction. We are watching the US go over the cliff of bankruptcy. They already were up shit creek, and even worse they are paddling the wrong way."

I'm just an average citizen with his own blog. I.e. I spout opinions about nonsense with little research and formal education.

So... instead go read the opinions of those that have formal knowledge and education.

Could the U.S. go bankrupt (literally)?

which links to this article

Uncle Sam's Credit Line Running Out?

A little bot of google, and here's another one.

Question: Setting aside for a moment the concept of whether the US is or is not bankrupt. If enough people believe the US is bankrupt, can that make it come true? Can perception create the reality?

I think it can. If enough lenders and investor start to doubt the US government's ability to repay its debts, three things will happen. Lenders will stop lending and ratchet up rates to try to recoup the existing debts, and investors will pull their money out of the US. Bam! The US goes bankrupt in reality as its funds dry up due to investor and lender anxiety.

The reaction from some corners would then state that we should stop speculating about it since perception might create the reality. Lending and investing is speculation. Ending speculation about the viability of a loan or investment would stop lending and investing. Can't have one without the other.

2 comments:

Ken Breadner said...

Bang on.

(In case of emergency, please remain seated and wait for your federal bailout.)

John Lee said...

"If enough lenders and investor start to doubt the US government's ability to repay its debts"

That's not really the issue. If the interest paid on those debts, and the relative value of the currency in which the interest is paid is as good or better than that which can be gotten elsewhere, then repayment won't be requested.

But if the US$ falls, and interest rates don't increase accordingly as compensation, watch out....