Ok sorry guys, this might be a "simple question", but simple questions can lead to big insights nevertheless. So I want to be an investor in the global stock market, and the biggest part of that is US stocks. And as an investor it's my obligation to understand the risks. Yes, my fear is they might default in one of the next decades and my US stocks (which would be like 40% of my personal wealth) goes up into smokes.
Typical arguments: Of course I have informed myself and the standard answer is "this is never going to happen". Ok probably true, but that's no argument and does not fulfill my obligation. The other argument is: They won't do it, because it will raise their interest rate. This argument I can't understand. Let's say you cut your foreign debt by 90%. Logically, only if your interest rate rises by more then 10x, your new principal payment is higher than before. Is there any data that interest rates will long term go 10x? Also, you could say: Hey I have no foreign debt, my debt to GDP ratio has improved. Is there any data / arguments that disputes my logic?
My take on this (is this logic right?): If the US was a person that earns 100 dollars a day, defaulting on their foreign debt payment would save this person around 1 dollars a day, so not much. Now the only question is if they gain or lose more than one dollar in total with this move? So we have two cases:
Case a) Defaulting costs the US more than 1% of their GDP. This would mean their total income would shrink. So the US won't do it and US investments are safe.
Case b) Defaulting costs the US less than 1% of their GDP. In this case the US could do it, but as the consequence is less then 1% of US GDP, so my investment in US and global stocks would not suffer a big loss or even is going up as the total GDP of US rises. US investments are safe.
In summary: I don't need to trust the US government to not hurt foreign investors. I only need to trust them to not shoot themselves in the foot. My aim with this post is to gain trust into a globally diversified stock portfolio through understanding why the US will never default.