Deficit Owls | Forced Government Default Can Only Happen On Foreign-Currency Debt Or Fixed Exchange Rates @deficitowls5296 | Uploaded August 2016 | Updated October 2024, 3 hours ago.
Discussion of what can force a government to default, and a few historical examples. If a government issues its own currency and makes no other promises (such as a fixed exchange rate or to peg the price of gold) then it can never be forced to default. They might do so for political reasons or because they are stupid, but they can't be forced.
On the other hand, if the government makes some sort of promise to peg or borrows in a foreign currency then it can be forced to default. If it borrows in a currency that it can't issue, then it may wind up in a situation where it doesn't have any of that currency left and can't easily get any.
If the government pegs an exchange rate or the price of gold, then it must have sufficient reserves of that currency/gold to be able to maintain the peg (to maintain a gold peg for instance, it must buy gold if the price drops too low, or sell gold if the price rises too high). If there are too many people trying to convert and the government is running out of reserves, it can offer bonds (and let the market determine the interest rate) to try to lock up some of its own currency so it can't be converted. If the people don't trust the ability of the government to maintain the peg, then there might be no interest rate high enough to prevent people from converting.
See the whole video here: youtube.com/watch?v=leXHTTOLzO4&list=PLKvPLZsgEcXSbdqMUTc-4usIO-9f0xBlc&index=4&spfreload=5
Discussion of what can force a government to default, and a few historical examples. If a government issues its own currency and makes no other promises (such as a fixed exchange rate or to peg the price of gold) then it can never be forced to default. They might do so for political reasons or because they are stupid, but they can't be forced.
On the other hand, if the government makes some sort of promise to peg or borrows in a foreign currency then it can be forced to default. If it borrows in a currency that it can't issue, then it may wind up in a situation where it doesn't have any of that currency left and can't easily get any.
If the government pegs an exchange rate or the price of gold, then it must have sufficient reserves of that currency/gold to be able to maintain the peg (to maintain a gold peg for instance, it must buy gold if the price drops too low, or sell gold if the price rises too high). If there are too many people trying to convert and the government is running out of reserves, it can offer bonds (and let the market determine the interest rate) to try to lock up some of its own currency so it can't be converted. If the people don't trust the ability of the government to maintain the peg, then there might be no interest rate high enough to prevent people from converting.
See the whole video here: youtube.com/watch?v=leXHTTOLzO4&list=PLKvPLZsgEcXSbdqMUTc-4usIO-9f0xBlc&index=4&spfreload=5
