Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Worst Case Scenario: Seven Potential Consequences of a U.S. Debt Default

Stock-Markets / US Debt Jul 27, 2011 - 07:44 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleDavid Zeiler writes: Each day that passes without a deal to prevent a U.S. debt default brings the United States closer to a financial calamity that would be more severe than the failure of Lehman Brothers in 2008.

Dueling speeches from U.S. President Barack Obama and Speaker of the House John Boehner, R-OH, Monday night did nothing to resolve the impasse between Republicans and Democrats over how to reduce budget deficits and raise the debt ceiling past the $14.3 trillion limit by Aug. 2.


The contentious rhetoric of recent days has raised concerns that lawmakers will fail to reach a compromise by the deadline – with disastrous consequences.

"I've never, never seen a breakdown like this," Paul Light, a U.S. government scholar, told Reuters. "This is a defining moment in America's inability to act."

Should the deadlock over avoiding a U.S. debt default endure past Tuesday's deadline, it will trigger a financial crisis of vast proportions:

  • Plummeting equities: When Lehman Brothers failed, the Dow Jones Industrial Average dropped 504 points in one day, and kept falling for months afterward. A default by the United States on its debt could hit even harder. Lance Roberts, CEO of Streettalk advisers, told The Fiscal Times that stocks could fall 50%. That would torpedo retirement accounts and hurt investors large and small.
  • Missing payments: the government borrows about 40% of what it spends every day. If it can't borrow, then it will have to cut spending by 40% immediately – more than 10% of gross domestic product (GDP). That could mean missed payments to government contractors and recipients of government assistance. It may also mean that hundreds of thousands of federal workers will be furloughed without pay. In addition to the personal pain, billions of dollars in government spending will vanish from the economy.
  • Interest rates: Credit rating agency Standard & Poor's already has warned of a 50% likelihood that it will downgrade the credit rating of the United States in the coming months – as much for its high debt levels as the possibility of default. If lawmakers allow a U.S. debt default, S&P says it will cut the country's credit from AAA to D. That would mean higher interest rates (and higher costs) not only for U.S. debt, but for all credit. Because other types of lending – including home loans, credit card rates and student loans – are based on U.S. Treasurys, the cost of borrowing would skyrocket for consumers and businesses alike.
  • States and cities: Likewise, states and municipalities would face higher borrowing costs, since their rates, too, are tied to Treasurys. That will make all capital projects – roads, water systems, hospitals, schools – more expensive.
  • Credit crunch: Higher borrowing costs and financial turmoil could lead to another credit crunch like the one we saw following the Lehman Brothers collapse. And that would further strangle the U.S. economic recovery.
  • Bank crisis: A less obvious problem arising from a U.S. debt default would be how it affects large banks, which use Treasurys as collateral for their own borrowing. "What happens if treasuries as collateral aren't seen as the risk-free instruments they have been?" said Money Morning Contributing Editor Shah Gilani, who is worried about the impact of discounted Treasury holdings on the banks' leveraged positions. "Could an ugly round of global de-leveraging undermine investor confidence again and derail hoped-for economic growth?"
  • Lower dollar: Already in a years-long slump, the dollar will sink even further against the world's other currencies. S&P has estimated a U.S. debt default could cause the dollar to drop 10% or more. A weaker dollar will make imports more costly, but that's not the worst of it. A default or credit downgrade could cause the dollar to lose its status as the world's reserve currency. And that would be very bad for the U.S. economy.

Combine all of the above and you can see how a U.S. debt default could implode an already shaky economy. Not only would the recession return with a vengeance, but the economy could sink even lower than it did in 2008-2009.

"It's conceivable the worst-case scenario is that the entire financial system of the world just freezes up, and it will make what happened with Lehman Brothers look much less by comparison,"Bruce Bartlett,a former Reagan White House policy adviser, told The Fiscal Times.

Source :http://moneymorning.com/2011/07/27/u-s-debt-default-would-be-worse-than-lehman-brothers-collapse/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in