Some readers have asked what would occur should every single government in the world just abolish, or default, on their debts. Although the answer may be simple to those who understand the global economy, for most it is quite a real question. If every single country in the world just decided to default on their financial obligations, the following would most likely briefly describe the general result.
|What if this was all eliminated?|
- First realize that there are different governmental levels. Federal, State (Provincial) or Municipal (city). Each level has debt and obligations in the form of bonds. We’ll assume for the sake of the scenario that each level of government decides to default on their obligations completely wiping out their deficits and budget shortfalls.
- This would wipe out the bondholders. Who are they exactly? Well institutional banks, international organizations such as the IMF or World Bank, could be another layer of government loaning to another (Federal to State/City does happen), personal investors, or even charities in the form of trying to keep a fund alive.
- Why do you care? Well, banks invest the savings of their customers. This would completely wipe out the savings of most of the population, and destroy bank’s ability to issue credit. Why is credit needed? For almost everything from beginning a business, to buying a new car on payments, to buying a house with mortgages, you get the point. Bank’s would have a lot less liquidity and would essentially stop loaning.
- International organizations who have now no fire power to help around the world with problems such as natural disaster to supplying rebels with the ammunition to overthrow their tyrannies would cease to exist. Why? They simply would have no money.
- Personal Investors and people who invested in the bank or government bonds would see their entire life savings wiped out in most cases. This would flood the job market with anyone who was retired as they would be forced to work again.
- The job market would be non existent as there would be no liquidity. Credit is used on a daily basis by millions of corporations around the globe to conduct daily business, like manufacturing plants securing parts in to continue production. Without credit this fiat currency based economy does not run. The money multiplier effect would cease to exist. The bank runs that would occur would destroy all banks.
- Governments may be debt free, but no one in their right mind would lend them money again. This would cut funding for many programs from Health Care, Welfare, to basic stuff such as police and fire fighter services.
- With cutting to all these services as the government could not raise money from issuing bonds, the job market destroyed, bank runs causing the destruction of financial institutions, little taxation revenue, chaos would ensue.In simple terms, the above would be the answer to the question. The chain reaction should all governments default on their debt would be catastrophic, and most likely reset global economic activity a decade.