- The default will reduce the market value of Treasury securities. Owners of bond funds will immediately recognize losses in their investment portfolios.
- Foreign investors will become reluctant to invest in America and stop using the US dollar as a reserve currency.
- The value of the dollar will plummet, perhaps to the extent that it becomes worthless in foreign markets.
- The US will find it difficult, if not impossible, to refinance its maturing debt or to pay for its ongoing financial obligations.
- Liquidity will plummet, not only for the Treasury, but for corporations, banks and individuals.
- Credit will be jeopardized. Mortgages, credit cards and other borrowings will become virtually impossible to acquire.
- The value of all financial and real estate assets will plummet.
- The consequences to employment and economic activity will be massive.
- The contagion would spread to the rest of the world.
July 16, 2011
Playing Chicken and the Debt Ceiling
Playing chicken requires the interaction of two idiots and it results in either: 1) the destruction of both parties, or 2) the bigger idiot winning. As an observer of the reckless debate over the country's debt ceiling, I'm worried that the former will be the result. If all it meant was the demise of a political party, it might be okay, but the trouble is that the destruction will also jeopardize the safety and dreams of spectators to the debacle.
What are the consequences of an extended default if the debt ceiling isn't lifted? Here are a few:
If all of this were to happen, supplies of food and guns to protect them will be the only truly valuable assets. It's irresponsible of our elected leaders to even contemplate such a scenario. They shouldn't be holding the dreams of people hostage just to make political points.
Posted by Alan Bahr