Interest rates skyrocket as the government tries to persuade both foreigners and locals to keep their money in the country. While this policy may work for a time, it eventually handcuffs the economy. Companies, small and large, as well as individuals, cannot borrow to finance business and growth, and the economy falls into a recession. Panic, near and far, sets in. Now that the floodgates have been opened, money starts to flow out of the country in shiploads.
Panic is now in full swing.
Stock and bond markets cascade into never never land, and we have an outright crisis on our hands. If Latin America goes, the US export market takes a major hit. If a major demand center dries up, US businesses take a wallop. The government is finally forced to devalue the currency. Because the government does not have to defend its currency any longer, it should be able to bring interest rates down, which in turn can help to jump start the economy and get the ball rolling once again.