Key Takeaways

1. US defaulting on its debt can cause a collapse of the global bond market, potentially leading to high unemployment and even a possible great depression.
2. While a US debt default may send inflation soaring, causing the US dollar value to reduce significantly, some argue it might act as a 'flight to safety' in the short term.
3. The world needs to prepare for a possible 'de-dollarization', either by investing in commodities or considering alternate currencies like stablecoins.

Understanding A Possible US Debt Default

The discourse around a potential US debt default has been abuzz, especially viewing the year 2023. It poses the question of what may happen if the $31 Trillion dollar debt held by the US cannot be serviced. History provides a lens to decipher this, with multiple countries like Spain, Russia, Mexico, and even the US, in 1840, having defaulted on their debts.

The Impact on the Global Debt Market

The first consequence of a potential US default will be the collapse of the U.S. debt market, which is currently valued at $51.3 trillion. This failure will likely ripple across international debt markets, given the interconnectedness of the global economy. When governments default on their debts, it results in a loss of faith in the respective nations and a direct shift in their international bond markets.

Furthermore, this may deeply impact capital-intensive businesses and government bonds, causing their values to drop significantly. It could effectively slow down credit flow in the economy, leading to sizable layoffs across various sectors.

Inflation and Currency Devaluation

The second consequence points towards a dramatic surge in inflation. Economies in distress often resort to printing more currency to alleviate fiscal pressure, an approach that has been adopted by nations like Sri Lanka and Argentina in the past. However, the more money in circulation, the more the currency gets devalued, leading to higher inflation.

The US dollar, which accounts for 60% of global Forex reserves, may start getting devalued in a similar situation, reducing its buying power. People may start selling US dollars, leading to further devaluation and potentially, inflation.

The Flight to Safety

An intriguing phenomenon that may follow the default is the potential 'flight to safety.' Historically, during high-risk periods, money has generally flowed from emerging economies to more stable ones. However, if the US, considered a stable economy, defaults, where does the money go?

One argument suggests a short-term strengthening of the US dollar, a viewpoint not universally agreed upon. Others are of the opinion that commodities may become the asset of safety. An alternate belief includes the emergence of gold-backed stable coins as a form of currency trading at a national or international level.

Decreasing Reliance on US Dollars

Another potential impact of a US debt default might be a gradual decrease in the reliance on the US dollar. Countries are likely to gradually reduce their US dollar reserves. The slow decay of US dollars may accelerate the quest for alternatives, with countries like Russia and China considering using cryptocurrencies backed by gold as an underlying stable coin.

A Possible Great Depression-Like Situation

The fifth and rather dark potential impact of a US debt default points towards a possible depression-like situation reminiscent of the late 1920s' Great Depression. World trade may slow down, unemployment rates may rise, and industries may collapse in case of non-agreement on de-dollarisation.

In such times, those holding cash could still find ways to wealth by buying assets at significantly discounted rates, a model previously executed by Warren Buffet. Ethical or not, this represents the business side of such an economic downturn.

Are We Prepared?

The last 65 years have seen the US debt ceiling raised 78 times, making it likely that it will be raised this time too. The president has mechanisms to bypass Congress if necessary.

However, considering the potential impacts of a US debt default, the world needs to prepare for possible 'de-dollarization.' Whether this entails investing in commodities, considering alternate currencies like stablecoins or other methods, it is crucial that measures are taken to mitigate the risks associated with such a situation.