What Happens if the U.S. Government Goes Broke?May 11th, 2010
What happens to investors if the U.S. government goes broke? With the condition of Greece, Spain, Portugal, Italy, Great Britain and yes, the U.S., this is a question any prudent investor must ask. No, I don’t have a crystal ball, but we can look at the broad picture and analyze the situation.
Unfortunately, if you’re crazy enough to loan the U.S. government money; i.e., to purchase U.S. government bonds at this point, you’re out of luck. If the government goes broke, they’ll default on their bonds and you’ll be paid less than a dollar on the dollar.
What’s perhaps more likely is that the U.S. government will inflate its way out of debt by simply printing more money and thus devaluing everyone’s cash. This will, in all likelihood, create rampant inflation, thus devaluing all bonds and creating the same effect as the U.S. government defaulting on their debt. The only difference is that they take all bonds down with them in this case.
But what about stock investors? Fortunately, even if the U.S. government goes broke, I believe people will continue to drink Coke, go to McDonald’s, purchase gas, buy Proctor & Gamble toothpaste, wear out their tires and do most of the “normal” things they do in their daily lives. Hence, corporations will continue to retain monetary value.
Yes, I believe that inflation will hurt the stock market and yes, I believe there will be riots in the streets if the U.S. government goes broke. However, I also believe that people around the world (remember that most of our companies are global) will continue to go about their daily lives as best they can.
Ultimately, the U.S. will go the way of the Roman Empire. We don’t know when or how fast, but one constant in world history is that nations rise and fall. But I believe that mankind, and thus the global economy, will continue to march forward. We don’t sail around the world in wood ships anymore. And likewise, with or without the U.S. government, I believe the global economy will continue to march forward.
What do you think?
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