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| Photo by money.cnn.com |
What Will Happen If We Actually Default, and Possibly Even Before The Deadline?
- Significantly increased interest costs on the national debt
- Long-term negative impacts for the U.S. economy
- Real, tangible, and costly consequences for everyday Americans
- Severe, unpredictable consequences for the U.S. and the world financial system
- Macroeconomic consequences that increase with each day the debt ceiling restrains activity
- An immense amount of unpredictable downside risk to the U.S. economy
The
Center For American Progress lists the above items as what will happen if our legislators don't lift the debt ceiling in a timely manner. Actually, we can learn from the past and realize that we may not even have to hit the deadline before damage is done. When Standard and Poor's downgraded the U. S. credit rating in August 2011it said “the downgrade reflects our view that the
effectiveness, stability, and predictability of American policymaking
and political institutions have weakened.” An increase in the interest premium paid on the federal debt of between 0.1 percentage points and 0.5 percentage points
would cost taxpayers between $120 billion and $600 billion over the next
10 years.
See the Entire
Center For American Progress article at
www.americanprogress.org/issues/budget/report/2013/10/10/76713/what-should-we-expect-if-the-united-states-defaults-2/
Virtually every kind of credit used by middle-class Americans—from
credit cards to student, auto, and home loans—is connected to interest
rates on Treasuries. Typically, the issuers of these credit products
make their profits by charging an additional interest spread on top of
Treasury rates, so an increase in the interest rate on Treasuries alone
will drive up borrowing costs.
Increased credit costs would have a significant direct effect on the
recovery, even in the case of a very short-term default. As investors
demand a larger risk premium on Treasuries, this cost will be passed
through to financing costs in the housing and auto sectors. After
struggling over the past few years, these sectors have recently regained
steam and have begun to lead the recovery. Due in part to favorable
lending conditions and pent-up demand, auto sales are on pace for their
best year since 2007.
None of these costs are trivial, especially at this fragile moment in
the economic recovery. Default will carry long-lived increases in the
risk premium paid on Treasury bonds, which filter through to every type
of borrowing and banking done by Main Street America. Increased
volatility in asset prices and decreases in consumer and business
confidence as well as household wealth are harmful to an economy at any
point; given the current state of the recovery, even these
consequences—which are the least severe and most easily understood ones
of a temporary default—will impose real, significant costs on average
Americans.
If the American economy were a typical one, a default would go something
like this: Investors would get spooked, pull capital out of U.S. stocks
and bonds, take losses, and move their money to safer assets in other
countries. Back in the United States, interest rates would rise and
asset prices and the U.S. dollar would fall. Imports would become more
expensive and inflation would rise. Gross domestic product, or GDP, and
employment would fall. A default would be catastrophic, but in an
utterly predictable way. Over time, the fall in the value of the dollar
would make U.S. manufacturing and exports more competitive, leading the
economy out of a deep recession and bringing the country back to
reasonable conditions after a mere lost decade or two.
In part, in the conclusion of the article,
Michael Madowitz an Economist at the Center for American Progress states that the United States has already been through one financial crisis,
which taught us valuable lessons about the financial system. Legislators
would be wise to consider those lessons now. The day-to-day U.S.
economy is more reliant on a well-functioning financial system than
previously thought, and there is a much clearer picture of how
destabilizing financial market turmoil is to the real economy. The
system is also less stable and less well understood than previously
assumed—an especially important lesson for legislators who are
proceeding as if they can use the U.S. economy as a bargaining chip in
an unrelated, entirely political disagreement.
Political considerations aside, it is all but inconceivable that
Congress would be irresponsible enough to not lift the debt ceiling.
This belief is likely responsible for the lack of market movement
against U.S. Treasuries so far, but the lack of movement underscores how
destabilizing it could be if Congress fails to lift the debt ceiling
before it affects the global financial system and American families.
It's time that you spoke up. Contact YOUR Congressmen/women and Senators and tell them to STOP playing politics and do the work that they were elected to do. We're OUT OF TIME!
Find and contact YOUR Congressmen/women by using this link where all you need is your zip code:
http://www.house.gov/representatives/find/ At this site it is very easy to find who your Congressmen/women are AND to send them an e-mail.
Find and contact YOUR Senators (2) by using this link where all you need is your zip code:
http://www.senate.gov/general/contact_information/senators_cfm.cfm At this site it is very easy to find who your Senators are AND to send them an e-mail.
