"There are three views on whether the US will default on its government debts. The first is: Hopefully yes, and this August offers a good opportunity. The second is: Possibly yes, but this would be bad – so we need some form of fiscal austerity. The third is: Under no circumstances, and any talk of a need for austerity is a hoax.
The first view is mistaken. The second view hides a dangerous contradiction. And the third view borders on complacency. How can we find our way to fiscal responsibility? We need tax reform.
People in the first camp think that the US government has become too big and the only way to cut it down to size is to limit its ability to borrow. A constitutional amendment to limit the size of government relative to GDP or to require a balanced budget could work – but experience suggests there are always ways for a future Congress to escape any such constraint.
A big part of the underlying problem is that the world has a taste for US assets – foreign citizens like the ability to buy and sell dollars in liquid markets, and they are particularly fond of US government debt as a place to keep their rainy day money. Private investors and government wealth managers around the world wring their hands about the trajectory of US deficits and debt – and then buy more of that debt.
In one interpretation of this view, the only way to remove the ability of the federal government to borrow is to actually miss some payments – thus convincing the financial markets that the government is not really a good credit risk..."
at http://baselinescenario.com/2011/07/07/will-the-united-states-default/
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