The Monsieur’s Brief: What Happens if the US Defaults?

Posted on July 20, 2011

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A new series of article summaries to help true gentlemen- Monsieurs, get a better handle on things going on globally, culturally and nationally. Consider this a cheat sheet for intellectual conversations.

1. What Happens if the US Defaults?

IF the US defaults, it would destroy the credit system as we know it. The fundamental benchmark interest rates in modern financial markets are the so-called risk-free rates on government bonds. Removing this pillar of the system—or creating a high degree of risk around U.S. Treasurys—would disrupt many private contracts and all kinds of transactions. In addition, many people and firms hold their rainy day money in the form of U.S. Treasurys. The money-market funds that are perceived to be the safest, for example, are those that hold only U.S. government debt. If the U.S. government defaults, all of them will “break the buck,” meaning they will be unable to maintain the principal value of the money that has been placed with them. [Read the rest on Slate]

The Monsieur’s Cheat Sheet:  In short, a US default would result in the loss of trust in banks and capital flight resulting in a cash run not unlike or worse than what we saw during the Great Depression.

2. Mao Vs. Optimus: The Movies That Point Towards an Evolving China

Transformers Dark of the Moon or the latest Harry Potter flick won’t be shown till China’s epic “Beginning of the Great Revival” has graced the silver screen. After centuries of isolation, China has grown in power and strength because it opened itself to the world, learned from the West and allowed its industries and society to borrow from and compete against the world’s best. It allowed for an ongoing modernization of its economic structures and possibly its political institutions as well. Its leaders Deng Xiaoping and Jiang Zemin understood that this openness was key to China’s success; However, a new generation of Chinese leaders might decide they have learned enough and that it is time to turn inward and celebrate China’s unique ways. If that happens, the world will confront a very different China over the next few decades. [Read the rest on Time]

The Monsieur’s Cheat Sheet:  History repeating itself? After Zheng He’s voyages during the Yuan dynasty, Emperor Wu of Ming China believed that nothing from the “barbarian” outside world was needed in China, instituting an isolationist policy and ending almost all trade and diplomatic relations.

3. How the world can buy its way out of poverty for just $100 billion

Poverty is a highly relative concept, but the usual definition of “absolute” poverty is an income of less than $1.25 a day.  Chandy and Gertz from Brookings Institution suggest that by 2015 there may only be 586 million people living below $1.25 a day, suggesting that the annual cost of eliminating poverty in poor countries could be only $40 billion in four years’ time. That’s the theory, at least. But the $40 billion figure rests on the assumption that we can identify the world’s poorest, work out exactly how poor they are, and deliver them the right amount of money to get them to $1.25 a day. [Read the rest on ForeignPolicy]

The Monsieur’s Cheat Sheet: It’s a theoretical pipe dream. We haven’t even figured out how to stop countries like Greece and the US from defaulting and going bankrupt. No one is going to figure out how to end world hunger as the financial system teeters on edge risking ruin for ALL (not just the poor).

If you must print this cheat sheet for intellectual conversations, make sure to use recycled paper OR print on both sides of a fresh sheet.

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Posted in: the critic