Is USA too big to fail financially speaking?

Question

According to some articles I've read. The US government now borrows so much money from foreigners that it even borrows the money to pay for the interest on its previous loans.

The national debt is now worth many trillions of dollars. And some economists now argue that USA is too big to fail. Foreign lenders will not do anything to disturb the current situation. Because if they stop lending. Then the US dollar may go down. And all those trillions of dollars worth of debt would become worthless.

But if this argument is true. Then does this mean that foreigners will become sort of like charitable organizations. They will keep lending money to USA indefinitely, no matter how big the debts get. And USA will be able to live beyond its means forever and ever?

Such an arrangement sounds pretty good to me. But would foreigners really want to do something like that?

Answer 1

No, they would stop lending at some point. But if the US were to actually default, there would be some sort of adjustment in the repayment -- just like when Argentina defaults on its debt every 30 years or so. That adjustment, however, would wreak a lot more havoc than in Argentina.

Answer 2

I don't think so, I think that bad decisions will bring us down. Specially from our politicians.

Answer 3

I think you've largely answered your own question.  Why, indeed, would foreigners want to keep sending the US goods and services in exchange for dollars and US government debt that seem to be worth less and less as time goes on?

It depends in part on whether other countries think the US economic situation is likely to improve.  At some point, they could decide that their dollar-denominated assets are no longer worth much and that they should exchange those assets for, say, euro-denominated assets while they still can.

It may turn out to be a "tipping point" situation, in which the flight of a few investors causes a drop in asset prices and causes other scared investors to follow their lead.  Like a bank run.  Predicting exactly when the tipping point will happen may be impossible.  But without a change in the fundamentals of the US economy -- such as a closing or reversal of the trade and current account deficits, or an improvement in financial firm balance sheets -- we're in an unstable equilibrium that could tip at any moment.

When the government bails out a firm that's "too big to fail," you have a single large actor to bail the firm out and stick with it through the hard times.  A market composed of individual foreign investors, on the other hand, could abandon the US one-by-one in a snowballing fashion, as each investor decides to cut his or her losses in the face of falling prices.  Because there's no one firm, country, or group able to decide that the US is too big to fail, nobody ever takes sufficient action to keep it from failing.

Answer 4

We owe our biggest financial debt to China.  But I could care less how much money the government has in its pockets, i'm more worried about how much is in mine.  

Right now government is to big and over reaches its limits, i wish some foreign lenders would cut us off.  Then maybe we would operate within our means.  Last time I checked, big brother had already robbed me of $10,000 from my paychecks this year.  I guess overtaxing civilians isn't getting the job done anymore.  

Foreigners hate the U.S and I cannot imagine any country acting charitable toward us.  I can however picture the reverse.

Answer 5

+ No economy is too big to fail. If the US continue to reduce the value of its currency to make interest repayments (i.e. create digital money or print money) and borrow more at the same time, then the cost of imported goods particularly essential resources (e.g. crude) will cost an astronomical sum leading to price inflation and eventual economic collapse.

+ At the same time, the US may lose some of its key assets to foreign ownership.

+ The US can reduce the effects of the worst case scenario through becoming more self-sufficient and reducing the amount of imported goods. In the short term, this will impact on the standard of living.

Answer 6

As of July 17, 2008, the United States debt stood at $9.518 trillion dollars.  And NO, the USA is not to big to fail.  It is our huge debt burden that is the main culprit to the declining value of the US dollar.  The way we service our annual deficits ($500 billion for fiscal year 2007) is to sell treasuries.  Sure, there are some United States pension plans and mutual funds buying the treasuries, but a large percentage of them are bought by foreign governments - China as an example.  When the rest of the world gets nervous that our debt burden is just to high to pay back, they will stop buying treasuries.  If that happens, then the only way for us to operate as a government is to print bills naked - meaning we print money without first selling the treasuries to cover them.  Read below for more info:

http://www.geldpress.com/2008/07/us-budg...

Answer 7

No. Think of the Great Depression: was that too big not to fail? When they say that it's too big to fail - they're sort of implying that failure would be shocking for the entire global economy - indeed it is possible but I hope not!

Foreign investors are looking for profit not charity! Despite what one person suggested in another question of yours American investors are looking for profits also.

What actually happens is that the Fed keeps printing money and this imposes a "seigniorage" tax upon those who hold $US. For example, the US owes China $10T and in one year there is SO much inflation that they effectively only owe China 9.9T.

The USA is not a first choice lender and has not been for some time now.