7894bdb0_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 4:41
What do crises involving the repudiation of external debt and domestic debt have in common? Any chance that the U.S. government might default on its obligations down the road? Most commonplace episodes since WWII have been largely in the domain of emerging markets, in which confidence has been lost very quickly. There are some advanced economies that had post-WWII defaults, for example Greece, which now sits at over 100% debt/GDP, was in a state of default till the mid-1960s, not that long ago. Generally what you see before a default on sovereign external debt is an inability of the government to service that debt. Usually because that debt is denominated in somebody else's currency. When Korea in 1997 came to the brink of default, it was because the debt was denominated in U.S. dollars and the Bank of Korea cannot print dollars. They can print won. The U.S. debts are denominated in U.S. dollars, so will probably be inflated away before you see an outright repudiation or default. You can just print the money. Inflation is a form of partial default. We won't default de jure, but we might default de facto. In the book, whole chapter devoted to issue of who is penalized or who gets defaulted on--external creditors, domestic creditors, or both? Domestic creditors, who are usually the ones holding the domestic-currency debt--that doesn't apply to the United States because foreigners also hold U.S. dollar-denominated debt; we are a reserve currency. In the majority of cases, it is domestic residents holding domestic-currency debt. Take into account both de jure defaults and also defaults through inflation and sometimes hyperinflation.
Reinhart on Financial Crises | EconTalk | Library of Economics and Liberty