The Free Press, Mankato, MN

October 8, 2013

Debt default could create 'apocalypse'

Why it matters: Numerous experts say U.S. default would dwarf the 2008 financial crisis

The Mankato Free Press

---- — Its seems we have come to a high stakes game of chicken in Washington D.C. as Democrats and Republican further solidify their unyielding positions now focused on raising the U.S. debt ceiling.

Dozens of financial and treasury experts and economists interviewed by Bloomberg News have described the results of a U.S. debt default as “a financial apocalypse,” according to a report by Yalman Onaran for Bloomberg News.

To be fair, many do not expect it to happen, but note that the risk of it happening is higher than in 2011 when Congress and the president had a similar showdown over the raising the debt ceiling.

The experts describe a kind of domino effect on financial, stock and commodity markets should the U.S. go into default at what is now looking like a very troubling timeline of 10 days. Treasury Secretary Jacob Lew has pointed to Oct. 17 as the day the U.S. will be short on its debt payments if the ceiling limit is not raised.

The $12 trillion in government debt, experts note, is 23 times the amount of debt Lehman Bros. defaulted on in 2008, when it filed for bankruptcy. While pushing for limiting debt ceiling growth may seem like a simple action to rein in government spending to most people, the implications run much further and deeper. Experts say a government default would hit financial markets, mortgage markets, would raise interest rates and result in stifling the meager economic growth we’ve been experiencing the last five years.

That’s because U.S. Treasuries serve as a kind of backup investment for many other kinds of investments. If investors feel the security of the treasuries was somewhat diminished — a consequence of a default — it would send shockwaves through dozens of financial markets.

The stock market lost half its value after the Lehman collapse. Unemployment rose to 10 percent. Experts say this government default would be far worse.

The seriousness of the situation seems to be lost on the Democratic and Republican leaders in Congress. The lines are hardening, making fallback positions of compromise even more difficult to achieve.

Billionaire Warren Buffett has likened a using the debt ceiling to extract political deals to the use of a nuclear bomb, “too horrible to use,” he told Bloomberg News. Morgan Stanley CEO James Gorman urged his employees and the public to contact their member of congress and urge them to reject the “unacceptable consequences” of a government default.

Let’s hope Congress and the president are listening.