Quote from Runningbear:
Ghost of Cutten,
When you include unfunded liabilities, the US has about 50% more debt than the UK as a percentage of GDP. And about the same as Italy as a percentage of GDP. The problem is that the US is about 40 times bigger than Italy.
As a previous poster pointed out, US treasury yields do not reflect any type of short term threat, but the US has to rollover much of its current debt in 2012, 2013 and 2014, so these are real danger years.
Expect to see a dramatic spike in bond yield's during these years.
Think about it, treasuries were always considered a safe haven for nervous investors. As a foreigner, if I had bought treasures in a foreign currency during the last year, I would have got a three percent return, and lost 10% on the devaluation of the US dollar. That's not safe.
China, have already stopped buying treasuries for this reason. Eventually there won't be an investor dumb enough to buy all that shit paper.
By 2015, the US may not be technically bankrupt, but it will be in a lot worse shape than it is now. It will be third world country bad.
Runningbear
The other G7 countries also have 'unfunded liabilities'. You can't include them for the USA and compare with other countries whilst not including them for the latter. Besides, even including all the unfunded 'liabilities' (i.e. politician promises, which will be reneged on or funded by future tax increases and spending cuts), the debt level is still not higher than for example UK debt after WWII, which was not defaulted on. Besides, those politician promises are not debts, they can be repriced, renegotiated, cut, slashed, burned etc at the stroke of a Congressional pen. They are just political promises to their constituents, and we all know what politicians' promises are worth.
US Treasury yields may well spike, but it will be because the economy is recovering and US Treasuries at 3-4% yields are seriously poor value, not because the US defaults. UST yields were 6-7% a decade ago, and there was zero default risk then, so even a doubling of yields would not imply any truth to your argument.
Even if for some reason Congress doesn't cut spending, reduce benefits, or raise taxes to avoid bankruptcy, they can just let slightly higher inflation do its work of raising nominal incomes and thus tax receipts, easily paying off the debt. Retirement and SS benefits will not be indexed competitively, and will thus be 'cut' in real terms by stealth, with understated official inflation figures. The system will adjust before the crisis becomes unmanageable, as it always has done and always will do.
Finally, I notice you didn't address the reserve currency and Fed issue. In extremis, the US government can simply print money to pay the debt. However, there is no real reason to have radical inflation to do this. Just allowing a 1970s style headline rate of 5 or 6% would be more than enough to render the debt (including unfunded liabilities) manageable in 5-10 years or so. 10 years inflation at 6% is a 46% fall in the real debt burden, and a 71% fall in 20 years.
Also, 'bankruptcy'/default has a specific meaning. It means you fail to make an interest payment or principal repayment on the contractually obligated date. It does not mean that inflation occurs. If the latter were true, then every government in history has already defaulted on its debt, because every government has left the gold standard and had inflation over the years. Bankruptcy doesn't mean negative net worth either, otherwise everyone who has had an overdraft, student loan, or credit card balance as a young person would have gone to bankruptcy court. They didn't, therefore negative net worth is not bankruptcy.
