I agree that the prospect of a U.S. default down the road is… unsettling. I suppose the Taiwanese could stop sending chips to us, but then where would they sell them? Same with middle eastern oil: where would it go?

Back in the 30s, the default was always hard money: no cash for you! Today, it would be more likely to be inflationary, which wouldn’t be sudden, and wouldn’t even look like a default until some time has passed. And every. single. country. in this situation either defaults or wishes it did.

Canada did the same, with the loonie depreciating to $1.60/USD in order to pay for the 80s public debt hangover. It hurt, but it worked out with very little pain to the ordinary citizen.

At least with a demand side stimulus, we have the prospect of rebuilding a frayed infrastructure and promoting environmental restoration (I imagine at least some of the stimulus will be directed towards CO2 reductions). If it means a higher chance of $100/bbl oil in 3 years, well, that’s in 3 years, and we’ve already been there.

This is the box that we’ve put ourselves in.

Premier Broquiville of Belgium resigned after informing the U.S. that Belgium would default. England and Italy decided to meet just one more payment, due December 15, 1932. Hungary and Poland defaulted.

At the end of 1933, there was still no formal debt settlement. However, most of the debtor nations sent, at most, only token payments. War debts and reparations were effectively ended, but the complex trade war system of tariffs, capital controls, quotas, licensing requirements and other trade restrictions remained to frustrate the revival of international trade.

http://www.futurecasts.com/Depression_bottom-1932-1933.html

The British were combating their own inflation at the time when the Germans decided to help it along by counterfeiting the same amount of Bank of England notes that were already in circulation. Prisoners of war were forced to do the counterfeiting.

By the way, my thinking about the China/USA parallel started with your China=Alpha Creditor post. Thank you for the insight.

@Richard Kline
Thanks – and I like your point about the military parallels.

The tendency of history to rhyme if not repeat is worrying me over whose prospects are brighter, the creditors or the debtors / defaulters.

My post on FTAlphaville was more detailed – speculation rather than wisdom, I’m no China macro-specialist – but my worry is that China is going to suffer the external demand shock and internal financial crisis that 30’s America suffered when her Continental markets and borrowers defaulted.

Some of the default was explicit, some of it was through hyperinflation/monetisation of debt because their internal and external political weakness made this the only credible option. over renegotiating their obligations with foreign and domestic creditors and rebalancing government income and expenditure.

Yet in the 30’s, as Yves points out, the defaulting nations bounced back quickly (if unsustainably), through rearmament, fascism and eventually plunder. Meanwhile the USA went sideways for a decade.

The UK was not such a bad place to sit out the 20’s and 30’s in comparison. The question is, will America be in the inter-war British position (as military hegemon, reserve currency and a major banking centre)?

Or, will Europe be in the bystander position this time around while America’s weaknesses of political economy (conservative political apparatus without credibility; refusal to raise taxes and cut spending; weak federal system with limited transfer payments to states; patchy welfare state; red/blue division) produces something worse? Will Obama be a Weimar president?

I think your analogy with Argentina and Peron is intriguing although hardly encouraging! Still it is better than – and this may seem far-fetched, but it makes a point – remembering that Texas has oil and the right to secede and did not Vote For Change.

Another analogy worth exploring is the position of Japan (and, to a lesser extent, Korea and Taiwan)? Her heavy investment in China puts her in a similar to position to Britain w.r.t. to the USA in the 30’s.

A factor which was not present last time around is the existence of the petro-states. In the 30’s, these were under the control of Britain and today’s balance of payments and sovereign wealth phenomena did not arise.

Where they spend their capital, how they balance their budgets, which currency they accept for oil and – ultimately – whose help they accept to maintain internal and external security will probably be decisive.

There are opportunities to supplant America for Europe (nukes + potential reserve currency + their biggest market) and Russia (nukes + the rest of the world’s reserves + will pay anything for an Indian Ocean port). China has much less to offer – and India perhaps has the most to gain of all, since it is her back yard….

“But this analogy suggests an imminent collapse in the Chinese economy, and the descent of the US into hyperinflation, revolution and default like Continental Europe in the 30’s.” Not so much. For one thing, the US in 30 had a truly massive speculative bubble in equities and debt securities. China at present has its own internal weaknesses, yes—but nothing of the same scale. They couldn’t afford it. Their property sector is going to take a big hit, but I seriously doubt that it will be on the level of US property valuation declines in the Great Depression. China just is not as vulnerable.

A second dissimilarity regarding the possible outcomes for the US in the next five to ten years is that the political instability in Europe of the 30s had _non-financial_ causes. Germany, Italy, Spain, Russia, Roumania, Greece, in a different way France all had either conservative political apparatuses which had suffered mortal damage to their credibility in WW I, failed state inability to make the transition to industrial capitalism, or doses of both. Even in good economic times they would have been politically unstable; in bad economic times the economy was used as a wedge and a weapon for interests pursuing their own agendas. The US just is not in a comparable internal divide. We may very well get a burst of hyperinflation at some point in the US, yes. I would see us more as, say, Argentina in the 1950s. But there is not a really good prior instance of comparison: we’ll blaze a new path of nonfeasance, I think. We will most likely look like the UK in the 30s until we bumble our way into the war which undoes us right and proper. *sigh*

Slap’em on. Environmental tariff, OSHA tariff, social security tariff, health insurance equalizer, currency exchange rate rigging penalty…

To describe trade with China under the current conditions as “free” is just an Orwellian abuse of language. It’s true there a lot of greedy useless eater fronts in the USA who mouth the Chinese line for purely selfish reasons. These “subprime skilled” people (who include Paulson) can be safely ignored as no more substantive than Chinese commission shoe salesmen.

There was a chain reaction of WWI war debt defaults in the early 1930s. The UK owed the USA while the other Allies plus Germany owed the UK. The British also held a lot of bad loans to eastern Europe and Russia.

Actually, the other borrower countries (ex Germany) got through the Great Depression with less pain than the US.

They did better once they stopped paying their own war debts to the UK.

The US and Germany suffered the worst dislocation.

Massive loans from the US were the only reason Germany was able to pay any of the Versailles “reparations” to Belgium, France and the UK.

Now add in the USA’s current account surplus and creditor position in the 1920s. This all starts to sound very familiar, doesn’t it?

But then Indians are ultra-conservative and super-price sensitive if they smell an upcoming price-cut they postpone purchases.
Further with job cuts and salaries going flat to lower – this time its a little more – empty malls and stuff. (also terror attacks)

This is anecdotal evidence – it is manifesting itself in the numbers.