6 Ways That A Debt Default Would Destroy The Country, Literally

If you’re just dying to know then they’re at the bottom. Took a look and then come back and read the rest. You probably read the end of books first as well, don’t you.


Watching politicians fight has to be a top five on my list of “most cathartic things”….a list I should probably write. So this week and last have been just really, I mean really, fantastic. While it probably means I have a mental disorder, I love the posturing and gamesmanship that’s present in politics. I love the sly moves, the terrible and stupid gaffes, and the compromise understatements that try to make it look like both sides have won something.

But, what I don’t like is people out of work, an endangering of the economy, and a possible debt ceiling crisis that could ruin the lives of my friends and loved ones. If you’d asked me last week if I saw a debt crisis looming on the horizon in any realistic way I’d have said no. Now I’m not so sure.

You see, on October the 3rd, the New York Times reported that Republican House Speaker John Boehner had privately told Republican lawmakers that he “would not allow a potentially more crippling federal default.” That was a big deal and it gave both the markets and lawmakers reason to breath a bit easier. The thinking was that it’s okay for there to be a limited government shut down but that fighting over the debt ceiling would demonstrably harm the US economy. A full default might well send the nation hurtling into depression as confidence in the US’s credit worthiness took a big fat nosedive into “insolvent” status. So, that was a good thing. I was thankful for that.

But that was five days ago and in that five days the Speaker has apparently decided that he didn’t mean that after all. Now he fully intends to use the debt ceiling as a bargaining chip. I swear, it’s like the man thinks that the government belongs to the Democrats and that if he breaks it he can start his own government. Pro tip, John, you’re burning your own house down with your family still inside it. Here’s what the Speaker has to say now.

“We are not going to pass a clean debt limit,” the Ohio Republican said yesterday in an interview on ABC’s “This Week” program. “The votes are not in the House to pass a clean debt limit.”

Boehner Wrecking ball

…okay. So the Speaker believes that a majority of House Representatives would vote for the country to default rather than simply raise the debt ceiling. I’ve heard a lot of political fantasies in my day but this tops them all. The idea that a majority of House members would knowingly vote to default on the country’s debt is ludicrous and by ludicrous I mean not true. It’s absolutely not true that a majority of members would rather see the nation default than pass a clean bill that increases the debt limit. I mean, if they’d pass a clean continuing resolution to reopen portions of the government, which they would, then they’d definitely pass something like the debt ceiling which is infinitely more important.

Why is it more important, you ask? Because defaulting on our debt is an enormous deal. It might be accurately described as purposefully beginning the dissolution of the nation. The US borrows via the issuance of US treasury bonds which the nation sells to both domestic and international investors. Up until a default they have been considered risk free because Uncle Sam always pays his bills. They would no longer be risk free. Investors would be buying “maybe we’ll pay you” bonds instead of “you’ll absolutely get your money” bonds. No one would invest in that. It would be too unstable. What’s more, all the bonds that banks currently hold would become devalued. The banks would crash, all of them, ALL OF THEM. That means that the markets would then sink, jobs would further dry up, lending would freeze as interest rates skyrocketed along with risk, layoffs would begin as companies sought to make up the money they lost as a result of a stoppage in lending. It would be catastrophic and even if it just happened for a day or two the damage would be incredible internationally. Other nations own our debt and they borrow on the basis that they own debt (as assets) from the US that the US will pay. That’s a form of leverage. Without that, lending dries up for other nations as well.

What happens to you when you quit paying your bills? You end up homeless.

Here’s the six main effects according to the US treasury:

  • The debt ceiling impasse in 2011 contributed to long-lasting scars on financial markets.  The financial markets stress that developed in August of 2011 persisted for many months.  Then, as now, the economic expansion was vulnerable to adverse shocks.
  • Even the possibility of a default could lead to sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence.  
  • Sharp declines in household wealth.  Wealth is an important determinant of household consumption spending, and consumption spending accounts for about 70 percent of GDP.  From the second to the third quarter of 2011, household consumption fell $2.4 trillion.
  •  Increases in the cost of financing for businesses and households.  Increases in perceived risk and investor risk aversion mean that investors will demand a higher return on money lent.  That higher return implies higher costs of borrowing for households and businesses, which results in lower consumption and investment spending and less hiring.  The 30-year conventional fixed-rate mortgage spread over Treasury yields jumped by as much as 70 basis points late in the summer of 2011.  In the summer of 2011, the BBB credit spread jumped 56 basis points.
  •  A fall in private-sector confidence.  Consumer and business confidence were falling in 2011, and as the debate about the debt limit progressed, business and household confidence fell to levels that are typically only seen during recessions.  It took months before confidence recovered, even though, ultimately, there was no default.
  •  In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression.  The U.S. dollar and Treasury securities are at the center of the international finance system. In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression.

This isn’t just about the country anymore. Not raising the debt ceiling is about the global economy. It would really be unthinkable and if you believe that it’d be no big deal then you belong over at the Blaze, and nowhere else. You don’t belong with people who want to live in a civilization.

I’m just going to go ahead and put this out there, an economic collapse of this magnitude leads to circumstances that are ripe for fascism. There, I said it. That’s how fascism happens, economic collapse. Speaker Boehner may prefer a world like that but I don’t think he would. I believe this is full on survival mode for him because the Tea Party caucus is kicking him in the ass. But regardless, you can’t deal with people who will threaten to destroy their own nation’s economy to get a reduction in spending or the defunding of a law that they don’t like but that the President won re-election touting as his primary accomplishment.

This might all be fine in the end. It might all be grandstanding by the Speaker but it’s dangerous and it’s not fun and it’s not cathartic. It’s immoral. It should end. The deadline is October 17th, nine days from today. Thought Catalog Logo Mark

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