Originally Posted by haha
In response to your main point, I think it is unclear that if given the stark choice, the US would prefer to stiff small domestic owners of FDIC insured accounts, about whom the case could be made that it was not exactly unknown that the FDIC was woefully underfunded; or default on money full faith and credit owed to our bankers the Japanese, the Chinese, and the oil exporting nations.
I think my main point was that whether a Treasury default or an FDIC default is more likely depends entirely on what the nature of the crisis is. An FDIC default doesn't 'solve' the same problems that a Treasury default would.
My secondary point was that a U.S. default is an entirely political act, right now, considering that we have a monopoly on the unit of exchange in which 100% of our debts are denominated. Stiffing voters to benefit foreigners doesn't seem like a smart political move. But your point is well taken, that defaulting on our external obligations is not costless. But neither is it costless for the FDIC to default, considering that the vast majority of financing for our banking system is insured, overnight deposits, that will vanish in days or weeks once a single dollar is lost. It's not clear to me that a complete banking collapse is a better alternative than being shut off from external financing. And it's also not clear to me that external financing would be forthcoming in the face of a complete banking collapse precipitated by a failure of the U.S. government to honor an implied guarantee.
Of course a Treasury default could just as easily precipitate a bank run, so maybe it is not possible to silo the two. But given a choice to place a bet, I'll bet politicians take care of voters before they take care of the Chinese, but that is just one opinion.