When nations and bondholders see a better future

Yesterday, House Speaker John Boehner (R-OH) disavowed default on Treasury debt. On Fox News Sunday, he said, "That [default] would be a financial disaster not only for our country, but for the worldwide economy. Remember, the American people on Election Day said we want to cut spending and we want to create jobs. You can't create jobs if you default on the federal debt." Sometime in May or June, I expect enough spending will have been cut to enact a debt limit increase. Peter Davis reporting

Not quite true, the default happens because after the last stages of contraction as this research shows.

These economists looked at the quarterly data for defaulting nations, and found the proper sequence of events:  1) The nations is near  bottom,  2) growth starts, then 3) default occurs, in that order. Nations enter contractions when they discover their blunders from the past. Upon discovery, they naturally reject the past and move on, and that means default.


Default is a two way street, former bond holders and the nation discover a better path forward, and future gains appear to overcome the costs of current default.