Strategic Default

Strategic Default?

by
BusinessPoliticsUS & World

It seems like the only sure things in this world are death, taxes and the United States government NEVER defaulting on its $31 trillion debt. But what if the United States does the unthinkable and does exactly what everyone thinks it will not? Its plausible that a situation has arisen where a strategic default on its debts actually be a master chess move given the current state of global finance.

What if the debt could be leveraged to combat the economic assault from countries like Russia, China and other BRICS nations that are rejecting the West’s global world order in mass. Nobody is denying that the United States defaulting on its debt would lead to an economic disaster akin to The Great Depression. But given an unmanageable debt crisis paired with the collapse of the United States Dollar as the world’s reserve currency could a strategic default be the best move on the board? 

Current state of The Global financial system: 

Since the Covid-19 pandemic swept the world in late 2019 the financial world was thrown into unknown territory. In an attempt to save the global economy during an unprecedented shut downs governments printed trillions of dollars. The results of that were record high inflation, supply chain distributions and a decay of the global financial system. 

Shortly after this Russia made the decision to invaded Ukraine and completely destroy the existing world order. In response to this event the West (the United States and its allies) hit Russia with extraordinary levels of financial sanctions. From cutting off Russia from selling their number one export, oil, seizing Russian oligarchs assets abroad and denying them access to the SWIFT international financial system the West unleashed what it hoped would be an economic nuclear bomb that would force Russia to quit its power grab in Eastern Europe. 

In reality this was not effective for a number of reasons. One being that Russia has built its own alliance, the BRICS nations, consisting of Brasil, Russia, India, China and South Africa with this alliance the Russians have been able to circumnavigate these financial constraints. The BRICS nations were also able to fight back with economic punches of their own. Without Russian oil to supplement Europe’s energy demand, inflation in the oil markets delt a blow to the Euro Dollar system. China, using it’s “zero covid” policy as cover was able to completely disrupt the global supply chain leading to heavy inflation throughout the West.  

This leaves the world in its current position. It is clear that the West is in a fight with the BRICS nations to determine who will dictate the terms of world order. The BRICS nations are all in agreement that the days of the United States Dollar acting as the world’s reserve currency  have come to an end. In August the BRICS nations will be announcing their own currency that will be used to rid themselves of the financial weapon of the West.

The United States and the West have found themselves in a major fight with inflation and the Federal Reserve has been forced to raise rates at a record pace to try and curb what could turn into a hyperinflationary event. This has led to a major decline in liquidity resulting in the failures of banks such as Silicone Valley, First Republic, PacWest and many more to come. With a recession in the West eminent and government debts soring there seems to be no easy solution. If the Federal reserve chooses to cut rates and stop a recession inflation will persist to a point of no return. On the contrary leaving rates elevated will create economic damage that will lead to mass bankruptcies, layoffs, a recession and possibly worse. This is occurring at the same time that the West has incurred massive amounts of dept greater than its own GDPs.

From the outside the West seems to be in an unwinnable situation given its “available” options .    

Flip the board:

Given the current state of financial markets it seems like the West is about to be handed it’s largest loss on the global stage ever. But could a strategic default on the hundreds of billions of dollars be the best move? 

The reason why the United States and its allies are able to run up such large debts is because of the stability of Western governments since WW2. Buying treasuries and debt from these countries creates a constant stream of revenue that the West has been able to pay for decades, this is why BRICS nations have been buying these debts for decades. If the west was to cut off these payments it would bring economic destruction to countries that are owed hundreds of billions of dollars. Countries are structured on a foundation built of US treasury income, and by removing that foundation who knowns what will collapse. 

The argument could be made that if the United States was to default on portions of its debts it could restructure the outstanding debt in a much healthier way, leaving it in a stronger position moving forward. If the BRICS nations want to abandon the dollar, the United States could counter by not paying back debts owed to these nations. 

 

The United States (alone) owes the following amounts to BRICS countries based on data from the US Treasury Department (2021):

  1. China – $1.064 trillion
  2. Brazil – $261.7 billion
  3. Russia – $4.7 billion
  4. India – $217.9 billion
  5. South Africa – $10.4 billion
 While these numbers relative to the total debt are small this will allow for a restructuring and more importantly create an economic environment which will allow the West to narrowly escape the vice it currently finds itself in. 

 

Lets discuss how the West and BRICS nations would be effected by this strategic default. 

The West: 

At first glance this idea seems like an economic kamikaze attack. By defaulting on its debts, treasuries would be sold in record amounts leading to hyperinflation in the United States dollar along with a lowered credit rating would be a major blow to Western economies. In this event the USD would be destroyed and the Western allies would be forced to ban together to produce and consume the goods required to sustain itself. While eliminating the cheap production economies of the BRICS nations would be tough, the West has been doing this since COVID when Russia was cut off from the world economy and China decide to destroy the global supply chain. It wouldn’t be easy by any stretch but Western societies are far better suited to handle a depression than their BRICS counter parts. 

 
BRICS:
This event would destroy BRICS nations economies equally if not more. BRICS nations rely solely on the West to consume its good and resources, if the West can no longer do this those economies will crater. The idea of the US defaulting on its debt is so crazy that most of these countries are not prepared to survive a condition where the US does the unthinkable. It is argued that in the event of a depression a modern service based economy, where automation and AI are utilized to provide more value per capita, will fair far better than larger manufacturing societies that have lost their main customer base. A strategic default leads to the next great depression but it would create a window where in global chaos the West could regain control of the world order. 
 
The West’s Gambit: 
It could be argued that a flaw in the BRICS’ master plan is that they are showing their hand to early. The West has known for years that the BRICS was aiming to destroy the USD and has had time to plan their response. Is it an accident that the West is planning on launching a CBDC this July? Could it be that the West has lured the BRICS nations into a trap where their attempt to destroy the USD will be matched with a crippling counter punch of their own economies while the West unveils a new currency, a Central Bank Digital Currency, which could be banked by precious metals and commodities to eliminate the risk of inflation and remain the leading Global financial power. 
 
 
 

While this is heavy speculation there are a few signs that make this more of a possibility than people would like to admit. 

1. Central banks have been buying gold at records levels, indicating that they for see a major economic shift occurring in the near term.  This gold could be used to great a new gold back CBDC that would be used to mitigate inflation if the USD was to enter a hyperinflationary state. 

2. China has been selling US debt for years. It seems obvious that the US defaulting on its debt to China would be a death blow to the Chinese economy. Pair that with removing the West as a Chinese trading partner and their is a good chance the Chinese economy completely collapses in this situation. 

3. The BRICS nations has openly announced that in August it will be launching its own currency. It would be foolish to think that the West has not known this for years and will be making an appropriate counter move. 

In closing, a default on the US debt seems like the least likely event that could occur and that is exactly why it is the best move for the West to play. Simply put, countries that are opting out of the Western financial system will not be paid back the hundreds of billions of dollars they are expecting to receive. While to most this sounds crazy the markets have another opinion, the credit default swaps on the US debt is nearing all time highs parabolically. 

This shows that people are betting heavily on the fact that the US could default on at least some of its debt obligations. 

While only time can tell what is about to unfold, it is certain that the global financial order is under going changes not experienced in 100s of years.  

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