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Some Possible Consequences of a U.S. Government Default

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  • Jeffrey Rogers Hummel
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    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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    Article provided by Econ Journal Watch in its journal Econ Journal Watch.

    Volume (Year): 9 (2012)
    Issue (Month): 1 (January)
    Pages: 24-40

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    Handle: RePEc:ejw:journl:v:9:y:2012:i:1:p:24-40

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    Keywords: sovereign debt crisis; default; financial crisis; repudiation; U.S. deflation of 1839-1843;

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    1. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44, pages 3-46, 02.
    2. Abbigail J. Chiodo & Michael T. Owyang, 2002. "A case study of a currency crisis: the Russian default of 1998," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 7-18.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 573-78, May.
    4. John Joseph Wallis & Richard E. Sylla & Arthur Grinath III, 2004. "Sovereign Debt and Repudiation: The Emerging-Market Debt Crisis in the U.S. States, 1839-1843," NBER Working Papers 10753, National Bureau of Economic Research, Inc.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
    6. Wallis, John Joseph, 2005. "Constitutions, Corporations, and Corruption: American States and Constitutional Change, 1842 to 1852," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 65(01), pages 211-256, March.
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