The US has gone from the largest creditor nation to the largest debtor nation in a relatively short time. There are many dire predictions now of the US defaulting on its debt and declaring bankruptcy, and the Dollar ceasing to be the world’s reserve currency. I do not expect that any of this is going to happen in a formal way.
An individual is truly bankrupt when he cannot pay his debts. He has no way of obtaining enough money. With a government it is the same if its debts are in a currency which it can not create, such as a foreign currency or gold. Examples of such governments are the individual States of the USA, and the nation states of Europe who cannot create their own Euros. However, if a government’s debts are in its own currency, then the situation is vastly different. It can create as much of its own currency as it desires to pay an unlimited amount of debt in its own currency.
This is exactly the situation the US government is in now, so at this point I believe the likelihood of the US formally declaring bankruptcy is negligible. However, the price of creating excessive currency is excessive inflation. This is a certainty, and as the currency devalues, then the US dollar debt is repudiated in proportion to the loss of purchasing power of the dollar. This will also help rescue all debtors of Dollars, especially the States and large corporations.
So, I believe that without admitting it, the US government is in the process of deliberately repudiating enough debt to bring the debt down to a level that interest payments are manageable. Once this is accomplished, within maybe 2-3 years, we can again expect inflation to subside. If we use statistics more reliable than the government’s, the inflation rate has been averaging about 5% annually for many years, and that is probably what we can expect once the current scenario has played out.
Once the current excessive inflationary scenario plays out, I expect that confidence in the Dollar will be renewed and it will remain the world’s main reserve currency, and all the dire predictions about the Dollar disappearing will not happen. This would probably be after the Dollar has lost at least half its value. There are really few other currencies which would qualify as a world reserve currency. Would anyone trust or would there be enough Rubles or Rupees or Pesos? I can’t see how. The only possible alternative seems to be the Euro, but it has inflationary problems of its own. The Renmibi might be a possibility, but I doubt that the world would trust the Chinese over the long term like they have trusted the Dollar.
The public is always wary of the last big economic jolt, which was the crisis which started in 2008. That was temporarily deflationary, so the public is now generally fearing deflation. But life is usually full of surprises, so I expect that by the time the public changes its expectations from deflation to inflation, that will be about the time when excessive inflation will fade away. And so the public will be fooled again.
In the future, were the US forced to take on debt in a currency other than its own, such as gold or a world currency, then the situation would change drastically, and in case of extreme such debt, formal declaration of bankruptcy could become a real possibility. This seems remote at this point.
Some other Points. Frequently I hear people espousing the idea that we are placing huge debt burdens on our children for them to have to pay in the future. I’m sure they were saying the same thing 50 years ago and I don’t hear today that we are suffering from the debts of our fathers. This might be true if the debts of the USA were external, but what they call issuing debt is really creating new money. So, it is us who are suffering right now from inflation resulting from the recent creation of money. It is a “debt” which is not really a debt, and which cannot and will not be paid back. If it were all “paid back”, that would require removing large amounts of money (or all money or even more money than exists) from circulation, which by definition is deflationary, and which would cause a great depression.
We could achieve a stable currency and economy by restricting leverage to very modest amounts, and then the government would need to issue enough money to make up for the money that disappears when leverage is reduced. After that, the government should only issue enough new money to keep the per capita supply of money constant. However, I am sure this will never happen. It would take away from the powerful the ability to manipulate the money supply to their benefit.