What would be the effect on the world if the USA just declared that all its debts,financial credit obligations and promissory notes were INVALID? We no longer recognize any past national indebtedness. That tomorrow we are starting over from ZERO. The whole world is running on Fiat currency anyway. I am open to serious informative discussion.
China owes us $1 trillion in debt left over from WW2 that we no longer recognize because China said it they wont pay. We should pay back our debt to them using those bonds
In their case they paid off bonds at 76%.
Basically having the world's reserve currency fail via debt repudiation would be worse than 1929, in terms of total collapse.
Most banks, worldwide, hold US Treasuries as their main form o reserves.
SO if T-bills were now with ZERO, then the Yen and Japanese banking system are FUBAR'd. Banks operate on fractional reserve.
For every $1 of reserve that they have they are allowed to lend out some amount of money. In the olden days it was frequently 10%.
So, based on the fact that the Bank of Osaka has $1 billion in T-bills sitting in their vaults they have made $10 billion in loans.
If the T-bills value goes to ZERO then they have no reserves, and their loans are all completely unsecured. This leads to a bank run.
Because Japan has their own central bank they could, theoretically agree to give Japanese banks all the money they need to meet the demands being made against them, but this would result in a huge amounts of new currency swamping the economy, so inflation.
Wikipedia: Argentine debt restructuring
Calling the dollar a "fiat currency" is a way of saying that its value depends on the size and strength of America's economy and the reliability of our promises. Ultimately, if the American economy can be made to grow at a high enough rate, the US debt becomes manageable because its relative size is diminished.
Why not pay of the debt with a $20 trillion dollar bond, with interest and balance due in 10,000 years? The pols in DC would have to promise to never run a deficit budget again. We can trust them.
Excellent question