There is speculation everywhere, including in the Financial Times, that the USA might go bust within ten years, and that the day of the dollar is over.
That framing is wrong. America cannot go bust, because its debt is denominated in its own currency and it can always create the dollars required to settle it.
But that does not mean we are safe. What can fail is the financial market itself, and that is the crisis nobody is preparing for.
The warning signs are everywhere. Share prices sit near all-time highs. Investment funds hold more of their money in shares than they almost ever have, with almost no cash left in reserve. The FT has concluded that US financial markets are "nuts" and have lost touch with reality. And bubbles always burst, and this one will. The promise that "this time is different" is always made, and it is always wrong.
This video explains what actually happens when confidence collapses, why our "animal spirits", as Keynes called them, can crash along with the markets, and why only governments can save us from the folly of finance yet again.
The biggest crisis we face is not that a crash is coming. It is that we have no plan to manage it. Think of this as the summer of 1939: a crisis about to emerge, with no one ready.
This is the audio version:
The Debate Ammunition for this video is available here.
This is the transcript:
Can the USA go bust? There is speculation, including in the FT, that it might go bust within 10 years.
Some think that Donald Trump will bankrupt the country. Others think it was unsustainable before he arrived.
Either way, the speculation is that the day of the dollar is over.
The fear is that the US economy might collapse with its currency, but the idea that the USA can go bust is absurd, because it cannot.
Every single cent of US government debt is denominated in US dollars. The USA can always make settlement because it can always create the dollars required. That is the straightforward answer to the supposed US government debt crisis. Modern monetary theory here provides an obvious answer to this obvious question. Neoliberal economics does not, but the simple fact is, the USA cannot go bust.
But the fact is the state of the US economy is crazy at present.
Share prices are around all-time highs.
Investment funds have more invested in shares than they almost ever have as a proportion of their total holdings.
They have almost no cash left in their bank accounts.
Their liquidity is low, and government bonds are being sold to fuel the increase in share prices.
The US financial markets are in a mess, and the pressure on the US economy is mounting.
The US government is losing a war.
Food prices are rising.
The cost of government debt is increasing.
Oil prices, gas prices, and what the US calls gas prices are all rising.
There is no resolution to any of those problems in sight, and there are real signs of stress already emerging in US financial markets.
A US hedge fund lost $15 billion in July. That was an all-time record loss for an institution of this sort in a month. So far, the markets appear to have taken this news well. There is no sign of serious difficulty at present, but that means the trigger point for a crisis has just not yet been reached. But the chance that such a trigger point exists is very real.
What will trigger the loss of confidence that will give rise to the crisis?
It could be something Trump does.
It could be something Israel does. Let's not discount that.
It could be the collapse of a major financial institution.
It could be a collapse in share prices, or a major accounting scandal perhaps involving one of the big tech companies.
The crisis, when it comes, will ultimately always come from a small event that gives rise to a massive loss of confidence. That's the way these things always work.
A trigger point will be reached because they always are. Bubbles always burst. This one will. The promise that this time things are different is always made, but that promise is always wrong. The only uncertainty that we have left is what will trigger this crash.
And the FT has concluded that the financial markets in the USA are, to use its language, ‘nuts'. They have lost touch with reality.
That does not mean that the USA can go bust. It cannot.
But US financial markets can, and that is pretty serious too.
The consequences of a financial market crash will spread rapidly.
Banks that lent money to buy shares will lose the security for their loans.
Banks lending to hedge funds, and many are, could suffer major losses. Stock markets might tumble.
Pension valuations will fall, and savers will suffer.
And most of all, the real economy will be hit.
That will be because real economies are always dragged down by financial crises. Why is that? That's because our ‘animal spirits,' as Lord Keynes called them, can crash along with financial markets. Our willingness to spend disappears as financial markets fall. We feel less well off. We feel the impact of that loss of sentiment, which has driven down the price of shares. Our spending then creates a crisis in the real economy.
Companies could go bust as a result of the financial crisis.
Banks could go bust because of that crisis. They will require government bailouts.
But people spending less will have as big a consequence again.
Everything will reinforce itself unless governments intervene. We are facing the risk of recession. We are even facing the risk of depression, which is very much worse, and without government action, that depression could become real.
In 2008, governments around the world saved their economies from crisis. They bailed out banks, companies, and the people dependent upon them.
Neoliberalism has, however, become very much worse since 2008. The belief is now rampant that governments cannot afford to do this again. And if governments do not act as a result, we could face a 1930-style depression.
We could talk ourselves into that crisis. And the biggest crisis we have is, in fact, not that we will see a crash, but that we have no plan to manage a crash.
Saying that the financial world is ‘nuts' is one thing. Doing something about it is something else.
Everyone is assuring themselves that this time it's different, but it isn't.
Only governments can save us from the folly of finance, yet again, and at this moment, the need for a bailout is going to be very high, and very soon.
But, at the moment, governments appear completely unprepared for that. There is no discussion. There is no indication of concern. There is no indication of preparedness. There is still talk that everything is going on as normal.
So the US cannot go bust, and nor can the UK, because our debt is also denominated in our own currency. But US banks can go bust, and UK banks could go bust as well. The financial system can fail even when governments cannot.
The consequences could be grim. You could lose your job, your income, your savings, or your pension.
You need to worry about what is going to happen. You need to think that this is like the summer of 1939, with a crisis about to emerge.
You need to worry, and if you don't, I will for you, and that's why you need to watch this channel, because I talk about what we can do to survive this crisis, and survive it we will, because people always do get through such things, but the cost will be heavy. And the cost of inaction will be enormous.
So we need to have an economics that understands that and talks about how this time it will be different, because this time we will make the existential changes to the way in which our economy works so that there won't be a next time.
That's what I think. What do you think? There's a poll down below. Please let us have your comments. Please do like and share this video, and subscribe to our channel, and hit that bell button so you get notifications when we make more videos like this. And if you'd like to buy Tom and me a coffee, because that's the least we need to keep these things going, that would be great.
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[…] The video that this Debate Ammunition supports is available here. […]
Clearly the US cant go bust.
BUT people can decide that they no longer wish to settle trades in Dollars be it for oil or anything else, and that might be interesting
Indeed, though in the past this has proven problematic. Iraq, Libya and Venezuela all faced forceful reminders when they tried to use other currencies for oil trading. However, Iran has managed to test the limits of US aggression and expose them.
It will be much more difficult for the US to enforce USD hegemony from now on. It’s just a question of which countries will pluck up the courage and when.
Thanks to all for a disturbing, relevant article.
Might it be that the U S A faces two types of danger?
1) External – the dollar loosing its power and validity as the leading international currency and so weakens the U S A financially and socio-economically
2) Internal – its “Low Intensity Polyarchy” has allowed the industrial-military complex to overspend on wars and the finance groups to profoundly weakened the U S A with its effective destruction of U S industrialim
Might it be that both dangers cannot be reduced, at least.to a significant extent, until/unless the U S A significantly changes its (apparent) foreign policy of world domination/exploitation by means of military force and control of the world’s oil and becomes a more genuine polyarchy/reasonably democratic democracy?
1939 or 1929 — surely the latter?
jc
I used 39 deliberately.
29 would also work, but would resonate with fewer people, I think.
The heat wave in Europe has had a big impact on the ability of the continent to feed itself (= food price inflation = BoE imbeciles reacting in the only way they know how))
El Nino is kicking off (prediction: lots of rain & possibly atmospheric rivers (there fixed – this time!) = regional disasters)
Over valued stocks, an under controlled banking/finance sector & a “correction” which could turn into a collapse (Sept’ is what I regard as the “starting line”).
War (Ukraine, West Asia, Sudan).
US mid-terms which afterwards will cause conflict in the USA over who has legitimacy
One wonders what will trigger stock market collapse?
P. S. Might it be that the F. T. has to present its article in terms of the U. S. A. “going bust” because, if it presented the matter accurately and honestly, it might damage/destroy essential Neoliberal lies about the absolute necessity to “balance the books” and fear and minimise the “National “Debt”?
The neoliberal myths about government, taxes and money have reigned supreme for over 40 years, both sides of the pond. The househod analogy has been promoted with increasing desperation since 2010, after being hidden behind Blairite PFI sleight-of-hand since 1997.
But people began questioning government finances after the banking crash of 2008, and began to be suspicious about Osborne’s lying justifications for “austerity”. When they saw government coffers cascading money into the economy, during Covid, they really began to smell a rotting neoliberal rat.
Reeves/Starmer had an opportunity in 2024 to exploit their huge majority, and growing public scepticism about austerity, inequality and trickle-down economics. They could safely have abandoned the household analogy and neoliberalism, for good. But they blew it, and Burnham/Healey will blow it too (this time, to justify defence spending).
The crash in the USA, and here, will be unnecessarily painful, but perhaps it will finally drive a stake through the heart of neoliberal economics, if, and only if, there are politicians with the integrity, intelligence and courage to seize the opportunity offered by massive chronic failure, and plough a different financial furrow. You have provided the seeds, the plough, and indicated the direction of travel.
It has happened before, it CAN happen again. But the cowards, charlatans, liars and thieves, who have been wrecking things so far, have to be thoroughly discredited, shamed and punished.
KUTGW!
Agreed
“The household analogy has been promoted with increasing desperation since 2010, after being hidden behind Blairite PFI sleight-of-hand since 1997.”
Interestingly, when Andy Burnham was interviewed in Bradford today about the cost of clearing up fly tipped rubbish, he used the expression ‘public purse’ instead of ‘taxpayer’s money’. Maybe the MMT penny has dropped somewhere.
I admire your optimism, and I hope you are right.
Ironically dealing with fly tipping is actually something that the household analogy applies to. District councils, usually the level of local government responsible for removing fly tipping, have to set balanced budgets. I wouldn’t read too much into what Burnham has said he could simply mean that he agrees that local government needs more funding from the “public purse” to achieve better fly tipping outcomes (free small scale commercial waste disposal seems the only way) but that will come at the expense of something else that relies on the “public purse”.
The worst case scenario you outline is truly terrifying – and presumably the FT really understands this – but they are not spelling it out<p>
Why on earth is there no discussion on the BBC about the possibility of a crash on BBC and what its ramifications might be. Are they worried they may be accused of causing a crash by even mentioning it.?<p>
There is the occasional mention that the market is at an all time high – and it might be a bubble – but definitely no discussion of implications or how to prepare.<p>
Oh dear
This may well precipitate a major downturn.Water as with power
Agreed
Surge pricing for water? You could not make it up.
The ‘Magnificent 7’ seemingly have $715 Billion in cash between them https://www.financecharts.com/screener/most-cash-country-us
Northern Rock was a similar somehow trivial tipping point
If the FT speculating about America “going bust” is this article (I’m pretty sure Alphaville doesn’t represent the editorial position of the FT anyway) you are being misleading. It is a report on a paper surveying the views of selected parts of American society, voters, bond investors, and people with economics or finance degrees about US Government debt. The people surveyed might think that the there is close to a 50/50 chance that the US will “go bust” in 10 years “Across all three samples, the average stated probability of a U.S. debt crisis within ten years is near 50%” but that doesn’t mean the FT does or has speculated as such.
Looking at the paper it appears that the main view of all three groups is that the value of US debt comes from it providing a safe asset for the private sector, sounds familiar. Also, whilst 50% of the respondents think there will be some sort of “crisis” the voters don’t plan on voting differently because of that nor do the investors plan on changing their portfolios. That suggests that the public and assorted professionals worrying about “government debt” is very much like assorted governments being “serious about climate change” its something you talk about an awful lot but don’t actually do anything about.
That the speculation existed is the story.
Don’t you get that?