Well, the real interest rate will be driven up for the rest of the world have doubt on the credibility of U.S. government now. The risk-free asset has been abused and become risky. The U.S. government has to offer extremely attractive return so that eventually American people will start to save and curb their spending enthusiasm. To pay for the high returns, tax must be increased and government spending must be cut. Since it is hard to increase tax at a matching rate, the government spending at all levels will probably fall by a significant amount. Ultimately, the diminishing role of the government should boost the economy since the federal government is the largest employer in the U.S. and its inefficiency is well known.
In sum, the American people have to save more and slowly retire their debt to the world with what ever American products that they are willing to export, such as food or movies.
Magnus: China Must Reform or Bust - China's debt markets are looking more and more like the West, circa 2007. And it's not clear the government can intervene as successfully.
1 hour ago