Not really. A default will set any economy far back.

You also risk unrests what with pensions cut and similar effects.

Look at Greece, they went through hell just not to default (again).

A large part of Greece's problem is that they're in the Eurozone and don't have any control over their monetary policy.

Greece is the only developed nation to default on an IMF bond payment and negotiated a 50 percent haircut on their bank-held debt.

They definitely defaulted.

Inflation is simply a partial default.

Yes, of course.

The U.S. does not borrow dollars from China without China having exported that many dollars' worth of trinkets to the U.S., for how else would China get those dollars to lend back to the U.S.?

Today's mercantilism is all of this form: country X maintains a long-term trade surplus with the U.S., forces its exporters to exchange their dollars for local currency, and then country X's central bank buys U.S. treasuries (i.e., lends to the U.S. government) with those dollars. Yes, those central banks could purchase other dollar-denominated assets, and if the U.S. Federal government did not engage in deficit spending then those central banks would have to buy other dollar-denominated assets -- or they would have to let exporters keep their dollars and figure out what to do with them, or perhaps trade would have to balance.

Another way to put this is that Congress' deficit spending drives the U.S. trade deficit. If the U.S. budget suddenly went into long-term surplus then the mercantilist nations would have to start buying other dollar-denominated assets, or else the trade deficit would have to swing into surplus (which would then see the U.S. become a mercantilist nation...).

So when someone says "what if China lent the U.S. $1trn and ..." what they're saying is equivalent to "what if China exported $1trn worth of trinkets to the U.S. and ...". And look! It's what actually happens. China maintains a long-term trade surplus with the U.S., so it's continually selling $$$$' worth of trinkets to the U.S. and continually lending similar amounts of $$$$ to the U.S.

Compare to "what if China lent the U.S. 10trn Renmimbi and ..." -- completely different idea, though, of course, the U.S. only borrows in dollars.

Yes, I didn't say all this earlier, but people should really know this (people really don't). EDIT: The 15 upvotes above are from people who do know these basic facts of economics.

Thank you for the explanation, though the edit detracts from an otherwise excellent post.

China could just as easily export oil to any country inn the world in exchange for us dollars. They could then buy US treasuries with those dollars. No need to conflate trade deficits with loaning money. They could also buy any number of things around the world with US dollars earned from selling us stuff. Given all that, I really think someone in This discussion is counting some dollars twice.

> They could also buy any number of things around the world with US dollars earned from selling us stuff.

Yes, I said this ("dollar-denominated assets").

> China could just as easily export oil to any country inn the world in exchange for us dollars.

Let's think this through (ignoring the fact that China is a net importer of oil, so they wouldn't export any oil). China sells stuff to Europe for dollars. Whence those dollars? Europe probably had treasuries, sold them, and paid China... except that actually they'd just transfer the treasuries -- why pay extra fees? Whence those treasuries? Well, Europe sold... stuff for dollars and so on.

(Actually, Europe borrows in euros, so euros too are a reserve currency, but let's ignore this. So it's not right for me to use Europe in the example above, but let's pretend for the argument's sake.)

Few things in economics are zero-sum games, but one thing that is a zero-sum game is international trade. If China maintains a trade surplus with the rest of the world, then the rest of the world maintains a trade deficit in the same amount. The U.S. dollar is a reserve currency because there is nothing else now to use as gold used to be used, and the rest of the world insists on maintaining a trade surplus with the U.S., which means they... have to accumulate dollars or dollar-denominated assets.

Because of this, the rest of the world can also trade with each other in treasuries, and so you're absolutely right about that. But new lending of dollars to the U.S. most likely stems from exports to the U.S. Certainly that would be true for any sufficiently large sums: the creditor could not accumulate such sums without exporting to the U.S.

So I stand by the assertion that for China to lend $1trn to the U.S. means to export a similar amount to the U.S. as well.

>> So I stand by the assertion that for China to lend $1trn to the U.S. means to export a similar amount to the U.S. as well.

OK, if I accept that then I'm left with the idea that it's a really bad policy. The stuff we bought from China has a useful lifetime (food gets eaten, products wear out), but the money we owe them does not - barring inflation of course.

The OP asked what if the US borrowed $1trn from china and spent it all on military spending. That's where the $1trn worth of "gadgets" comes from.

China exports N dollars' worth of trinkets to the U.S., then buys N dollars' worth of dollar-denominated assets, the majority of which are U.S. treasuries (so China lends them back to the U.S.).

Therefore "what if China lent the U.S. $1trn ..." is roughly equivalent to and interchangeable with "what if China sold $1trn worth of trinkets to the U.S. ..." and vice-versa.

Is the purchasing of bonds the only form in which foreign nations lend to one another?

As governments? Yes. Of course, the private sectors can and do also lend to other countries (both governments and private sectors).