Us debt crisis game theory

Then Greece, unable to pay its creditors on time, would be in what is called "technical default". What follows next is not at all clear. Let's look at two possibilities. First there could be "Grexit" - Greece alone leaves the eurozone but the other members live happily ever after. Second, Greek departure leads to the collapse of the eurozone. The first scenario is likely to be pretty bad for Greece but not for the eurozone - a payoff of 0,1. The second is bad for everyone - the payoff is 0,0.

The truth, of course, is that no one really knows which of these will transpire - here is where nature throws the dice. If the two prospects are equally likely, the expected payoffs look pretty bad for both players. So what is the bottom line? Faced with the messy prospect of letting Greece slide into default - and the significant risks of chaos that this entails - it looks better for eurozone partners to avert default and accept the Greek plan - or a watered-down version of it - after all.

This is better for Greece too - so unlike the Prisoner's Dilemma both players avoid the bad stuff. This may be what has been concluded - if so, there will be a settlement with no technical default at the end of the month. But a lot depends on how well the agreed plan works. Leave a Comment. Name required. Mail will not be published required. Google Search. There are a few different paths which one could take along this tree, depending on the outcomes of certain events. So, the Greek Financial Crisis, while a legitimate concern, could have actually been planned for and handled accordingly using the strategic tools derived from game theory.

This one crisis can be explained through game theory, which simply begs the question, how many others can be as well? By November , it realized it could not. That allowed the debt crisis to creep into The debt crisis took center stage throughout the presidential campaign. After the election, the stock market plunged as the country headed toward a "fiscal cliff.

The uncertainty surrounding the fiscal cliff in was hurting the economy. Congress avoided it by passing the American Taxpayer Relief Act. On January 1, , the approval of a Senate bill avoided the fiscal cliff in Those projections became even more severe in due to the coronavirus pandemic.

According to the CBO, real U. GDP is projected to grow 2. The solution to the debt crisis is economically easy but politically difficult. First, agree to cut spending, and raise taxes to an equal amount. Each action will reduce the deficit equally, although they have different impacts on economic growth and job creation. Tax cuts aren't great at creating jobs.

There is no need to create a massive debt by cutting taxes. Whatever is decided, the government can make it crystal clear exactly what will happen, which will restore confidence. That allows businesses to put the assumptions into their operational plans. Second, the government can delay any changes for at least a year after a recession. That, in turn, will reduce the debt-to-GDP ratio enough to end any debt crisis.

That's more than one-third of annual production. It also increased the U. Although that wasn't as dire as Iceland's situation, it had similar effects on the U. There has been less trust in the U.

As a result, the country is experiencing a much more slowly growing economy. Is it possible for the U. It's possible but not likely. When there is an economic crisis, investors buy U. They believe that it is the safest investment.