But could it be the case that American default is simply inevitable?

From Free Exchange:

"Will America default?

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Economist.com | NEW YORK

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Financial markets

Fiscal policy

Government spending

OUR own Grep Ip had a very interesting op-ed recently on the possibility that America might default on its debt. He noted that the credit derivatives market (American sovereign CDS traded at 82 basis points last Friday), now peg the probability of default at about 6%. That's amazing—last summer I found it incredible that CDS traded at 24 basis points. The rising CDS spreads are the result of speculation that spreads will rise even further, rather than the belief America will actually default. But even still, it suggests that markets are at the very least considering the possibility of a debt downgrade.

Mr Ip believes the government will sooner try and inflate down the debt than default, which is probably true. But he reckons that in the unlikely event America must choose between hyperinflation and default, the unthinkable could occur. In November, I imagined a scenario in which default could happen for political reasons, but that currently seems equally far fetched.

But could it be the case that American default is simply inevitable? As Mr Ip points out, the government must address its looming entitlement crisis. A solution there will involve either increased taxes or reduced benefits (and will probably some combination of the two), which is really just another form of default. Social Security is a pay-as-you-go system which means that there exists a social contract that current contributors will receive a particular annuity (based on wage and price inflation). Altering the benefit formula violates that contract, because the government will no longer pay what it promised cohorts when they paid into the system.

Still, a Social Security “default” or restructuring is probably the best alternative. Markets do not like surprises and most American put the probability of a change to entitlements near unity."

Me:

Don the libertarian Democrat wrote:

My understanding is that the Supreme Court held that:

http://www.rgemonitor.com/globalmacro-monitor/255267/was_there_ever_a_default_on_us_treasury_debt

"The clearest summation of the judicial outcome was in the concurring opinion of Justice Stone, as a member of the majority: • "While the government's refusal to make the stipulated payment is a measure taken in the exercise of that power, this does not disguise the fact that its action is to that extent a repudiation." • "As much as I deplore this refusal to fulfill the solemn promise of bonds of the United States, I cannot escape the conclusion, announced for the Court, that the government, through exercise of its sovereign power, has rendered itself immune from liability." So five of the nine justices explicitly stated that the obligations of the United States had been repudiated. There can be no doubt that the candid conclusion of this highly interesting chapter of our national financial history is that, under sufficient threat, crisis and pressure, a clear default on Treasury bonds did occur."

So the US can default, contrary to some opinions. I'd like to find out more actually. Although inflation is more or less a default, it has more negative consequences for the electorate than default, doesn't it? And, since the problem with raising taxes or cutting spending is political, just reneging on the debt seems politically more palatable.

Then there's this:

http://www.bloomberg.com/apps/news?pid=20601080&sid=aFgHlh.Dn4Lc&refer=news

By Stanley White and Shigeki Nozawa

Dec. 24 (Bloomberg) -- Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.

“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.”

Surely the easiest way for us to deal with the unwinding of the Saver: Export Country / Spender Country Symbiosis is for the Saver Countries to cancel some of the debt. This allows everybody to continue doing what comes naturally and doesn't demand preposterous ideas like people having to radically alter their behavior. Since markets don't like surprises, it will hardly come as a surprise that it's often easier to walk away from a debt than repay it, especially when it involves personal sacrifice. What could come as less of a surprise?