Grasping for a silver lining
If America ends up in a sovereign debt default while trying to reflate, there are unexpected benefits.
While most empires collapse in war, America’s may collapse in peacetime. This would disappoint nationalists, and make us an even greater global laughingstock, but preserve lives and political stability.
There is almost no historical precedent for peaceful imperial decline. In “The Rise and Fall of the Great Powers,” Paul Kennedy can offer only the Hanseatic League, a Renaissance-era Scandinavian confederacy. Every other great power he covers was defeated or bankrupted by a major war.
Yes, I have heard we are in Iraq. At $80 billion a year, that strategic disaster seemed expensive, until the Fed starting throwing around thirteen-digit bailouts last year. If the country goes broke (or, by corollary, greatly erodes the purchasing power of the dollar), it seems Iraq won’t be the reason.
More immediately, we appear to be losing our position as the global reserve currency. This may also not be a bad outcome in the long run. Having the reserve currency creates moral hazard, as artificially low interest rates can be sustained for years without rational consequences (inflation and falling dollar). We may soon see better government by reestablishing (whether we want it or not) a more immediate, market-based connection between financial policy and currency value.