Best of the Week
Most Popular
1.Gold And Silver Voodoo Analysis Price Forecasts - Austin_Galt
2.UK Saved From I.S. Threat But Scottish Independence Nightmare is Not Over! - Nadeem_Walayat
3.Silver Price At or Very Close to an Important Low - Clive_Maund
4.Gold And Silver - PetroDollar On Its Deathbed? PMs About To Rally? No - Michael_Noonan
5.Gold and Silver Bear Phase III Dead Ahead - Rambus_Chartology
6.Stock Market Major Selloff Looms - Zeal_LLC
7.Inflate or Die! When Leverage Fails and Market Hope Turns to Fear - Ty_Andros
8.Gold Price Very Close to an Important Low - Clive_Maund
9.Market Forecasts for Stocks, Gold, Silver, Commodities, Financials and Currencies - EWI
10.U.S. Aggression - Will Russia and China Hold Their Fire? - Paul_Craig_Roberts
Last 5 days
Stock Market Wil-e-Coyote Moment May Have Arrived - 1st Oct 14
Europe Teetering the Ddge of a "Japan-style" Deflation - 30th Sept 14
Economists Economic Atonement - 30th Sept 14
Everything You Need to Know About the Stock Market S&P Index Until Christmas - 30th Sept 14
Singapore Becoming Global Gold Hub - Launches Kilo Bar Contract And Gold ATMs - 30th Sept 14
Germany Fights on Two Fronts to Preserve the Eurozone - 30th Sept 14
Turn the Tables on the Gold and Silver Market Manipulators - 30th Sept 14
U.S. 2014 Election Business as Usual - 30th Sept 14
Gold - Time to Buy the Dip? - 30th Sept 14
Urging Investors to Stay Liquid for the Coming Gold Stocks Boom - 30th Sept 14
The Japanese Deflation Myth and the Yen’s Slump - 29th Sept 14
Epic Investor Optimism that Can Be Reversed Only by a Huge Stocks Bear Market - 29th Sept 14
Russia’s Gokhran Buying Gold Bullion In 2014 and Will Buy Palladium In 2015 - 29th Sept 14
The End of Monetary Policy - 29th Sept 14
Here's What Rising Interest Rates Really Do to Your Shares - 29th Sept 14
Is a Credible Stock Market Top Forming? - 29th Sept 14
Silver Price At or Very Close to an Important Low - 29th Sept 14
Gold Price Very Close to an Important Low - 29th Sept 14
Nihilism And The Unknown Future - 29th Sept 14
Stock Market S&P, NAS Change In Trend? None Apparent, But A Caveat - 29th Sept 14
UK Saved From I.S. Threat But Scottish Independence Nightmare is Not Over! - 29th Sept 14
U.S. Aggression - Will Russia and China Hold Their Fire? - 28th Sept 14
Currency Wars and the Death of the Euro - Audio - 28th Sept 14
Obscure Maritime Law Practically “Guarantees” Profits for These Energy Companies - 28th Sept 14
Stock Market Primary IV Underway? - 27th Sept 14
Darwin And The Climate Apocalypse - 27th Sept 14
The Global Middle Class and Copper Consumption, A Stop Spike Event - 27th Sept 14
Can Money Save The Climate? - 27th Sept 14
Gold And Silver - PetroDollar On Its Deathbed? PMs About To Rally? No - 27th Sept 14
Debt and Inflation Consquences of American Fear - 27th Sept 14
U.S. and Global Confidence are in Divergence - So Are Stock Markets - 27th Sept 14
Are U.S. Cars About to Crash? - 27th Sept 14
Why the U.S. Created and Armed ISIS From Libya to Syria - 27th Sept 14
Stock Market vs the Developing Bear Market for Liberal Democracy? - 26th Sept 14
Stock Market Major Selloff Looms - 26th Sept 14
How My Charts Uncovered Two Big Stocks That Are Soaring Like Small Caps - 26th Sept 14
What Cycles Reveal About Stock Market Crash - 26th Sept 14
Gold Not A Safe Haven On Terrorism, Middle East Bombing, Russia ... Yet - 26th Sept 14
Valuing Gold and Turkey Farming - 26th Sept 14
Gold $1200 Underpinned by Physical Demand - 26th Sept 14
Inflate or Die! When Leverage Fails and Market Hope Turns to Fear - 26th Sept 14
Market Forecasts for Stocks, Gold, Silver, Commodities, Financials and Currencies - 26th Sept 14
Gold and Silver Bear Phase III Dead Ahead - 26th Sept 14
The Home Depot Breach Boils Our Blood – and It Should - 26th Sept 14
Why the Pundits are Wrong About Crude Oil Prices - 26th Sept 14
Where’s the Economic Growth? - 26th Sept 14
Stock Market Future Bull - 25th Sept 14
The Specter of Global Debt Default is Once Again Rearing its Head - 25th Sept 14
All Major Market Analysis and Forecasts Investor Open House has Started! - 25th Sept 14
Federal Reserve Policies Cause Booms and Busts - 25th Sept 14
Currency Wars Deepen - Russia, Kazakhstan Buy Very Large 30 Tons Of Gold In August - 25th Sept 14
Strong U.S. Dollar Pressures Gold - 25th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Most Exciting Event in the History of Technical Analysis

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

© 2005-2014 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

Free Report - Financial Markets 2014