Saturday, October 12, 2013

US Government Default on Debt: What It Means To American Economy

What does a government shutdown mean to YOU - PERSONALLY? 

WASHINGTON — A prolonged government shutdown — followed by a potential default on the federal debt — and the consequences of which would be dire (to say the least). Here is just a sampling of what can and may happen on an economic scale:

(1) Financial markets would start to decline in value as many companies and individual bondholders have holdings within the United States Government.

(2) As stocks and mutual funds lose financial value, investors begin to stop investing. The longer the upheaval lasts in financial markets, the more investors begin to “sell off” securities in an effort to avoid even greater losses. As investor apprehension and the mass exodus grows away from financial markets, the closer a complete collapse of the financial system.

(3) The lower stock prices will also send the rapid devaluation of company-held stock into a free fall motion. As investors and company owners stop investing, employment will also grind to a halt and – quite possibly - send the unemployment rate higher only to further slow already sluggish, tepid economic growth.

(4) While a shutdown of a few days might do little damage, a longer standoff would suck money out of the economy and spread anxiety among consumers and businesses in a way that is likely to hold back economic activity.

(5) A default on the federal debt, which may occur within 30 days without congressional action, would be much worse. Failing to raise the debt ceiling would require the government, a major driver of growth, to cut spending by about a third, potentially forcing delays in Social Security checks, military pay and payments to doctors.

(6) There are other risks, too. On Oct. 17, the Treasury is to ask investors for $120 billion in loans. But if investors grow nervous about whether the United States will be able to pay them back, they are likely to demand higher interest rates, which would cause rates to spike throughout the financial system, leading to more expensive mortgages, auto loans and credit-card bills. As these interest rates begin to climb, spending will decrease as more expensive money costs will deter more people from parting with more of their money supply.

(7) U.S. bonds have long been a key pin of the global financial system. Failure of the government to pay on those debts would greatly damage U.S. credibility nationally and abroad.

(8) As spending slows, recession will loom more likely.

(9) American Businesses, who have cash reserves, will become less inclined to invest and hire.

(10) As financial uncertainty mounts, this emotional response will add to the economic uncertainty and will become a vicious, unrelenting feeling which may add to even more instability to the economy and destabilize economic growth. Positive emotion has long been a key driver of the American Economy and is gauged by the Consumer Price Index.

(11) The stock market, as measured by the Standard & Poor’s 500 index, was down four of five days last week, and the U.S. dollar also fell. More relevant, the cost of a type of insurance that investors use to protect themselves against default in U.S. government bonds has rocketed in recent days, suggesting the chances of default are increasing.

(12) Additionally, if the American Government faces to pay its obligations, contractors and builders will lose confidence in their government to be paid their amounts due. As this continues, more government jobs will become less desirable and could – theoretically – induce its own problems who would risk nonpayment for materials and labor invested in roads, bridges, buildings, etc.

(13) For example, the closure of national parks and museums may hurt hotels, restaurants and the people who work for them. The process of getting approval for a home loan could take much more time, slowing a housing recovery that is one of the few bright spots in the economy.

(14) A prolonged shutdown could trim economic growth in the final three months of the year by up to 1.4 percentage points. Under that scenario, the economy would hardly expand at all — at a time that is usually one of the most important economic periods of the year. Employment and income, overall for all citizens would be negatively affected.

(15) The Treasury has warned that it will have only about $30 billion in cash on hand by the middle of next month, and estimates are it will run out of money by the end of the month. If it is low on cash, the government is likely to hold back on payments until enough money comes in by way of tax revenue, according to a Treasury Department inspector general report. Social Security checks, veterans’ benefits and active-duty military pay could be delayed two weeks, according to estimates. Such delays would not only disrupt lives but also cause an economic contraction because that money often flows directly into the economy through grocery shopping, car sales and staple purchases.

(16) As a worldwide consequence, the United States currency could be devalued so much that other countries could refuse to accept the currency as payment. If this were to happen, (the loss of the United States currency as the World’s Reserve Currency) worldwide exports from the United States would be slashed significantly and could altogether nearly stop. If this were to happen, the United States would be vastly negatively affected by orders of scope and magnitude and theoretically could cause a worldwide Second Great Depression. If an economic depression were to happen, it would be nearly impossible from which to recover.

(17) There is simply not enough gold and silver to sustain the world’s economy. Even if investors were to invest in this as an “exchangeable currency” it may be priced so high that for the average United States citizen (or world citizen) that these precious metals could lose total value as there would be too little supply to satisfy demand.

(18) Since the United States dollar is the cornerstone of worldwide economic stability, losing complete value as a facilitator of trade, would send the entire worldwide economy into a possible economic “perfect storm” whereby the purchasing power of consumers – the world over – would lose the ability to trade freely and prosper.

(19) In conclusion, this whole economic system is based on 2 major things: First, credibility of the currency. Second, high consumer and investor confidence. Once these two issues are undermined across the nation and the world, it is almost impossible to retract and the consequences of which would be immeasurably dire.  Finally, an economic collapse would be 5 - 6x greater than the Economic Crash of 2007-08.

Reporting for the News,

Michael Hathman

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