Centrist Think Tank Conducts Study, Finds US Default "Could" Push Country Into Recession

Tyler Durden's picture

And for today's second most surreal piece of news (the first being that Osama was a fan of RedTube and Adult Friend Finder, whose stock tumbled 25% after its IPO on news that such a loyal customer is now dead), we turn to Reuters which brings us news of a "report" by centrist think tank Third Wave, due out on Monday, which finds that "the United States
could plunge back into recession if inaction in Washington forced a debt
default, according to a new analysis that arrives as the country
reaches the legal limits of its borrowing authority....
Some 640,000 U.S. jobs would vanish, the housing
market's woes would deepen, stocks would fall and lending activity would
tighten if the country were unable to pay its bills, according to a
report by the centrist think tank Third Way due out on Monday." And yes,
first Dow Jones and now Reuters confirms what we have been warning all this week, namely that "the Treasury Department is expected to hit its
$14.3 trillion borrowing limit on Monday, making it unable to access the
bond markets again. Lawmakers from both parties say they won't approve a
further increase in borrowing authority without steps to keep debt
under control.
" Yet back to the topic at hand: which is that someone actually paid money to discover what will happen to America when it filed for bankruptcy. If this was a paper out of the San Fran Fed we understand, but private industry? If there is one margin hike we approve of it is for the CME to hike the margin to 1000% cash in trivial common sense BS.

And for those who don't have blood shooting out of their eye sockets at this point, here are the details of what the debtors prison circle of hell would look like for the US.

  • Treasury bonds would lose their aura of safety, leading to a half-point increase in their interest rates. That would push up the U.S. government borrowing cost once lending activity resumed, leading to a $10 billion increase in annual budget deficits over the short term.
  • The higher interest rates would ripple through the economy, causing gross domestic product to decrease by 1 percent and employers to shed 640,000 jobs.
  • Banks would curtail lending. Small businesses would have a harder time expanding and credit-card interest rates would rise. Student loans and car loans would become more expensive.
  • The S&P 500 stock index would lose 6.3 percent in value over three months, causing retirement portfolios to shrink, the report said, citing research by financial services firm Janney Montgomery Scott.
  • The U.S. dollar's status as the world's reserve currency could be threatened as investors move cash to Swiss francs, Japanese yen, or Euros. That could boost U.S. exports but raise the cost of consumer goods like gasoline and electronics.
  • Home mortgage rates, which are tied to U.S. Treasury rates, would rise. Homebuyers taking out an average mortgage for a new home, currently $221,900, would pay an extra $24,738 over the life of the loan, dealing another blow to an already struggling housing market.

"Defaulting on our debt is not an abstract idea that might affect a few institutions on Wall Street; it would harm tens of millions of Americans in profound and lasting ways," the report says.