What if the U.S. renegotiated or canceled its international debt?

Ask an Economist

News commentators appear to universally deride Donald Trump's suggestion that the National Debt be renegotiated, whatever that means. What would really happen if the US decided to cancel its outstanding debt, or at least selective portions based on who's holding it, e.g. hostile governments, unfair trading partners, etc. Assume that the Washington will enact whatever legislation to avoid or minimize the economic and political shocks, at least in the US, e.g. issue new currency, start massive infrastructure spending program.


US government debt is considered the safest asset in the world. The US borrows at a low interest rate while it lends at a higher interest rate, an “exorbitant privilege” sometimes resented by the foreigners. Over the past two decades, a higher rate of return on its external assets (mostly risky securities held by US investors) relative to its liabilities (mostly US treasuries held by foreign central banks, including China and Japan) has cumulatively earned hundreds of billions of dollars for the US economy as a whole. With a risk of default on US treasuries, this can no longer hold. Capital will flow out of the US to Europe and China or other emerging markets considered safer. So far, the US has played the role of a world insurer/banker by offering safe deposits and investing in risky assets. With US debt no longer considered safe, the world capital markets will experience a much higher volatility thus denting the international financial architecture currently in place.

None of the measures suggested, such as “issue new currency, start massive infrastructure spending program” can offset the turbulence that a selective canceling of US outstanding debt is likely to engender.

Answered by:
Dr. Rajesh Singh
Last updated on November 19, 2021