Epiphanyblog

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Defaulting on the Debt

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Dollar representing downturn in economy after debt defaultIn a new Gallup poll, 42% of Americans do not want the debt ceiling raised under any circumstances while 22% do want the ceiling raised. But of the 22% who want the debt ceiling raised, less than a third say that “economic catastrophe” would result from not doing so.

I understand most people are busy with work and family so they don’t have time to explore the implications of a default, but they need to do so because their lives will be greatly affected. It’s not just that social security or medicare payments or military and contractor salaries will be delayed, there far more significant repercussions for the economic health and future growth of the U.S.

1- Sudden, massive drop in the stock market causing huge losses in retirement and savings funds. Most people lost up 1/2 of their IRA or 401k worth – or a combined total of over a trillion dollars – in the ’08 crash. A default will be much worse, wiping out whatever remains in those accounts.

2- Interest rates will soar. Analysts predict interest rates will climb by as much as 50 basis points. That could amount to a doubling of interest rates paid on credit cards, purchases of home and cars, variable rate mortgages, credit lines for businesses, etc.

3- Credit will not just tighten but contract to worse than after the ’08 crash, causing more small to mid sized businesses either to shut their doors or layoff most of their staff.

4- Many more small and community banks will go out of business as the money supply contracts.

5- Businesses large and small will layoff vast numbers of employees again, raising the unemployment figures to double digits.

6 – The deficit could increase by well over $500 billion, even for a short default, as interest rates on Treasury Bonds rise to protect investors’ interests. This increase will wipe out any any savings made thus far in reducing the deficit…and add more to it.

7 – Economists and analysts predict a 10% loss of GDP. In a $14 trillion dollar economy, that’s a loss of over $1 trillion in economic activity.

8- The US dollar is the world’s reserve currency because it’s always been the premier safe currency. As a result of being the reserve currency, the US has been able to borrow at low costs and has never had problems at currency auctions obtaining buyers. Over the last few years, the Treasury has had more buyers than bonds to sell. A default could change all of that. The BRIC countries, especially China, and the IMF have discussed changing the reserve currency to some other currency. A default will give China the argument it needs to push for another currency: the US can no longer be trusted as the keeper of the world’s reverse currency. The result of losing that status will reduce the value of the dollar worldwide and make selling Treasury bonds harder and more expensive.

9 – As the world’s largest economy, the combination of the above would push not just the US but the entire world back into recession – and possible depression. The loss of prestige worldwide by such a self-induced injury will be astronomic. The world may no longer look at the US as a superpower but somewhat like the USSR just prior to its end: without power and influence.

As Citigroup remarked to their investors regarding the consequences of a default, “what can you do after you’ve committed suicide?”

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Written by Valerie Curl

July 16, 2011 at 3:56 PM

One Response

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  1. I agree with you. Experience is the mother of wisdom😕

    Patrick Faber

    July 20, 2011 at 11:22 AM


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