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12 Ominous Warnings Of What A US Default Would Mean For The Global Economy

Tyler Durden's picture




 

Submitted by Michael Snyder of The Economic Collapse blog,

A U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash unlike anything that the world has ever seen before.  If the U.S. government purposely wanted to damage the global financial system, the best way that they could do that would be to default on U.S. debt obligations.  A U.S. debt default would cause stocks to crash, would cause bonds to crash, would cause interest rates to soar wildly out of control, would cause a massive credit crunch, and would cause a derivatives panic that would be absolutely unprecedented.  And that would just be for starters.  But don't just take my word for it.  These are the things that top financial experts all over the planet are saying will happen if there is an extended U.S. debt default.

Because they are so close together, the "government shutdown" and the "debt ceiling deadline" are being confused by many Americans.

As I wrote about the other day, the "partial government shutdown" that we are experiencing right now is pretty much a non-event.  Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world.  In fact, only about 17 percent of the federal government is actually shut down at the moment.  This "shutdown" could continue for many more weeks and it would not affect the global economy too much.

On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous.

And if the U.S. government is eventually forced to start delaying interest payments on U.S. debt (which could potentially happen as soon as November), that would be absolutely catastrophic.

Once again, just don't take my word for it.  The following are 12 very ominous warnings about what a U.S. debt default would mean for the global economy...

#1 Gerald Epstein, a professor of economics at the University of Massachusetts Amherst: "If the US does default, that will make the Lehman Brothers bankruptcy look like a cakewalk"

#2 Tim Bitsberger, a former Treasury official under President George W. Bush: "If we miss an interest payment, that would blow Lehman out of the water"

#3 Peter Tchir, founder of New York-based TF Market Advisors: "Once the system starts to break down related to settlement and payments, then liquidity disappears, as we saw after Lehman"

#4 Bill Isaac, chairman of Cincinnati-based Fifth Third Bancorp: "We can’t even imagine all the things that might happen, just like Henry Paulson couldn’t imagine all the bad things that might happen if he let Lehman go down"

#5 Jim Grant, founder of Grant’s Interest Rate Observer: "Financial markets are all confidence-based. If that confidence is shaken, you have disaster."

#6 Richard Bove, VP of research at Rafferty Capital Markets: "If they seriously default on the debt, what we're really talking about is a depression"

#7 Chinese vice finance minister Zhu Guangyao: "The U.S. is clearly aware of China's concerns about the financial stalemate [in Washington] and China's request for the US to ensure the safety of Chinese investments."

#8 The U.S. Treasury Department: "A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse"

#9 Goldman Sachs: "We estimate that the fiscal pull-back would amount to 9pc of GDP. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed quickly"

#10 Simon Johnson, former chief economist for the IMF: "It would be insane to default, but it’s no longer a zero-percent probability"

#11 Warren Buffett about the potential of a debt default: "It should be like nuclear bombs, basically too horrible to use"

#12 Bloomberg: "Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen."

A U.S. debt default could be the trigger for the "nightmare scenario" that so many people have been writing about in recent years.  In fact, it could greatly accelerate the timetable for the inevitable economic collapse that is coming.  A recent Yahoo article described some of the things that we would likely see in the event of an extended U.S. debt default...

A default would upend money markets, destroy bond funds, slam the brakes on lending, cause interest rates to spiral, make our banks insolvent, and deal a blow to our foreign trading partners and creditors around the globe; all of which would throw the U.S. and the world into economic disarray.

And of course stocks would crash big time.  Deutsche Bank's David Bianco believes that if the U.S. government starts missing interest payments on U.S. Treasury bonds, we could see the S&P 500 go down to 850 by the end of the year.

There would be almost immediate panic among ordinary Americans as well.  In fact, it is being reported that some banks are already stuffing their ATM machines will extra cash just in case...

With just 10 days left to raise the debt ceiling and congressional Republicans threatening to force the government to default on its obligations, banks are taking some dramatic steps to prepare for the economic chaos that would result should the brinkmanship continue.

 

The Financial Times reports that one major U.S. bank has started stuffing its automatic teller machines with extra cash in preparation for a possible bank run from panicked depositors. The New York Times reports that another bank is weighing a plan to advance funds to customers who rely on Social Security and other government payments that could stop in the event of a default.

Let's hope that cooler heads will prevail and that a U.S. debt default will be avoided.

Unfortunately, it appears that the Democrats are absolutely determined not to be moved from their current position a single inch.  They have decided to refuse to negotiate and demand that the Republicans give them every single thing that they want.

And who can really blame them for adopting that strategy?  After all, it has certainly worked in the past.  Whenever Democrats have stood united and have refused to give a single inch, the Republicans have always freaked out and caved in eventually.

Will this time be any different?

The funny thing is that once upon a time, Barack Obama was adamantly against any increase in the debt limit.  The following comes courtesy of Zero Hedge...

Obama Debt Ceiling

But now Obama says that it is so unreasonable to be opposed to a debt limit increase that any negotiations are out of the question.

So which Obama is right?

If the Democrats will not negotiate, a debt default could still be avoided if the Republicans give in.

And that is what they always do, right?

Perhaps not this time.  Just check out what John Boehner had to say on Sunday...

"I, working with my members, decided to do this in a unified way," the speaker said -- with demands to defund, delay or otherwise alter the Affordable Care Act.

 

Boehner had expected that the Obamacare fight would come during the next vote to raise the debt ceiling, “but, you know, working with my members, they decided, let's do it now," he said. "And the fact is, this fight was going to come, one way or another. We’re in the fight. We don't want to shut the government down. We’ve passed bills to pay the troops. We passed bills to make sure the federal employees know that they're going to be paid throughout this.”

 

"You've never seen a more dedicated group of people who are thoroughly concerned about the future of our country," he said of House Republicans. "It is time for us to stand and fight."

But will the Republicans really stand and fight?

In the past, betting on the intestinal fortitude of the Republican Party has been a loser every single time.

So we'll see.  Boehner insists that this time is different.  Boehner insists that he is not going to fold like a 20 dollar suit this time.  In fact, when he was asked if the U.S. government was headed toward a debt default if Obama continued to refuse to negotiate, Boehner made the following statement...

"That's the path we're on."

The mainstream media has certainly been placing most of the blame at the feet of the Republicans, but at least the U.S. House of Representatives has been trying to get an agreement reached.  The House has voted 26 times since the Senate last voted.  Harry Reid has essentially shut the Senate down until the Republicans fold and give the Democrats exactly what they want.

The funny thing is that this could probably be solved very easily.  If the Democrats agreed to a one year delay to the individual mandate, the Republicans would probably jump at it.  And because of epic technical failures, hardly anyone has been able to get signed up for Obamacare anyway.  So a one year delay would give the Obama administration time to get their act together.

Unfortunately, the Democrats seem absolutely obsessed with the idea that they will not give the Republicans one single inch.  They seem to believe that this will be to their political benefit.

But this is a very dangerous game that they are playing.  The U.S. government must roll over 441 billion dollars of short-term debt between October 18th and November 15th.

If a debt ceiling increase is not in place by that time, it will send interest rates soaring.  Borrowing costs for state and local governments, corporations, and ordinary Americans will go through the roof and economic activity will be hit really hard.

And as detailed above, we could potentially be looking at a financial crash that would make 2008 look like a Sunday picnic.

So let us hope for a political solution soon.  That will at least kick the can down the road for a little bit longer.

If a debt default were to happen before the end of this year, that would bring a tremendous amount of future economic pain into the here and now, and the consequences would likely be far greater than any of us could possibly imagine.

 

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Wed, 10/09/2013 - 02:15 | 4037124 August
August's picture

>>>Obama wants a hard default. ... his chance to destroy the Republican Party forever.

The repuglican party is too valuable to both the dems, and the higher-ups, in their current role of one-armed sparring partner cum stooge. Token opposition is helpful in maintaining a stable political system; ask the Aztecs. 

It's only when the repuglicans are destroyed that the status quo in the land of the free might, possibly, change.

Tue, 10/08/2013 - 23:15 | 4036902 401K of Dooom
401K of Dooom's picture

Screw This!  I am taking out my savings from my credit Union!   I recommend the next time you go shopping for a financial institution to put your money into, make sure that they will aloow you to withdraw all of your money at once.  The place I am at now only allows a max withdraw of $2500 per day.  It will take a few days to get my money out.  Oh and screw Obama and his minions!!!

Tue, 10/08/2013 - 23:31 | 4036931 Shizzmoney
Shizzmoney's picture

Bring on the market collapse.  I need a vacation.

Tue, 10/08/2013 - 23:48 | 4036964 aldousd
aldousd's picture

There is not going to be any default. Nothing to see here.

Wed, 10/09/2013 - 00:16 | 4037011 kchrisc
kchrisc's picture

I like this talk of default as possibly preventable. LOL

It is not a matter of if, but of when and how. "When" is only important to how bad it is going to be. The "how" could be a 'shutdown' or some other kabuki theater or a black swan taking a shit on some highly leveraged dike somewhere. Never the less, it will come and come hard.

Like building a town below a earthen damn, one day you WILL get wet.

Wed, 10/09/2013 - 00:21 | 4037017 polo007
polo007's picture

http://politicalticker.blogs.cnn.com/2013/10/08/senior-house-gop-source-short-term-debt-ceiling-may-be-way-out/

Washington (CNN) – The door the White House appears to have opened to a short-term debt ceiling increase may be a temporary way out of the standoff, a senior House Republican told CNN.

The Republicans may be willing to go for a short-term debt ceiling increase as long as the president agrees to use that time to negotiate, the source told CNN Chief Congressional Correspondent Dana Bash.

How long is short term?

This GOP source said maybe four to six weeks.

Still, it’s unclear whether Republicans could even get that short-term bill through the House without even a tiny concession on spending cuts from Democrats.

When President Barack Obama was asked during Tuesday's news conference whether he would be open to a short-term debt ceiling increase, he responded “absolutely.”

“I mean, what I've said is that I will talk about anything. What will happen is, we won't agree on everything. I mean, the truth is, is that the parties are pretty divided on a whole bunch of big issues right now," Obama said. "Everybody understands that."

The House GOP source said that the president’s call to Republican House Speaker John Boehner on Tuesday was a good first step – and they have to keep talking.

CNN’s Chief Political Analyst Gloria Borger reported on Saturday that a senior House Republican said one idea being considered is a six-week extension of the continuing resolution to fund the government, and the debt ceiling, to allow for time for both sides to negotiate.

Wed, 10/09/2013 - 02:19 | 4037130 Nehweh Gahnin
Nehweh Gahnin's picture

RED-BLUE noise, dude.  Red-Blue noise.

Wed, 10/09/2013 - 00:25 | 4037031 Walt D.
Walt D.'s picture

All this talk of default is just propaganda. The US collects enough in taxes to pay the interest on the debt.

To default would be like a furloughed worker deciding not to pay his mortage and car payment.

New York City made the decision to default on its bonds in the 70's. It has been paying for it ever since. People will not take there bonds unless there is a credit spread or insurance.

Obama may appear to be foolish, but I doubt that he would be short sighted enough to default when there was no need to in the first place. 

Wed, 10/09/2013 - 01:14 | 4037092 Das Capitalist
Das Capitalist's picture

Wow, the ZH commenters have gotten markedly stupider since the last time I was here.

Bring on default! Joo goebbels dronetards.

Wed, 10/09/2013 - 05:13 | 4037236 butchtrucks
butchtrucks's picture

You obviously haven't been here for a while.  The comments have been overrun by a bunch of sociopathic conspiracy-tards hanging out for some sort of dystopian 'rapture'.   These guys are acuatually giddy with excitement at the thought of US default.

Wed, 10/09/2013 - 01:57 | 4037111 Coldfire
Coldfire's picture

The gang of thieves known as the US government defaults with every dollar excreted by the Fed. It would be cool to see a public default, though. Then, if the Chicken Littles (minus Jim Grant) quoted in the above article are correct, the USG would be forced to shrink. It would still be 99.44% evil, but on a smaller scale. I can't see the Demopublicans voting for this. I see a last-minute compromise and the hidden (to most) default on the obligations of the USG accelerating with Bag Lady doubling the rate of QE as an inaugural move. Focusing on October 18 as the default date is a distraction. The default in motion since the Nixon Shock has never stopped.

Wed, 10/09/2013 - 02:11 | 4037123 Dan The Man
Dan The Man's picture

No default...that would require a congressman with a spine and/or a pair of grapefruit sized nads.  None to be found.

Wed, 10/09/2013 - 02:19 | 4037128 Nehweh Gahnin
Nehweh Gahnin's picture

"A U.S. debt default would cause stocks to crash, would cause bonds to crash, would cause interest rates to soar wildly out of control, would cause a massive credit crunch, and would cause a derivatives panic that would be absolutely unprecedented."

 

GOOD.  I'm ready.  None of those things will hurt me in the least.  It's time to mount this horse and ride.

Wed, 10/09/2013 - 03:00 | 4037156 robertocarlos
robertocarlos's picture

Almost worth it if that fuck Buffet dies penniless.

Wed, 10/09/2013 - 05:27 | 4037222 falak pema
falak pema's picture

he won't, everytime time the world goes into a tail spin he makes 10 billion.

As a reminder of where the current Oligarchy train has gotten the world in its hurtling momentum to build a new financial aristocracy all based on WS financial assets read this : 

Global Wealth Pyramid - Business Insider

Now you know that the 1% own > 40% of world wealth and the top 8% own 84% and the bottom 92% own 16%.

Thank you very much Ronnie & Maggy, the two catholic kings of the Pax Americana world of global aristocracy rise and middle class demise. 

Wed, 10/09/2013 - 03:06 | 4037162 Serenity Now
Serenity Now's picture

What makes me angry is that almost every media outlet, politician, and writer is lying about this.  THERE WILL BE NO DEFAULT ON THE DEBT.  We take in roughly $2T per year, and the interest on the debt is only about $500B.  Is that a lot?  Yes.  Is it more than $2T?  No.

The problem is that if we don't raise the debt limit, a/k/a keep the Ponzi scheme alive, then POLITICAL PROMISES won't get paid.  But don't conflate a political promise with the national debt.  They are not the same thing at all.  

So, if we take in $2T and spend $500B on interest, we have $1.5T left for everything else.  Of course, the government has been spending TWICE that amount thanks to borrowing, so there would be huge economic consequences.  Yes, a depression.  I won't lie to you.  But would it be catastropic?  No, just painful.

But by shrinking the government, you gain economic freedom, and said depression could be short-lived, as opposed to the Great Depression which went on for over ten years thanks to government intervention at every level.  Our standard of living is so high now compared to then, that it's ridiculous.  We have storage units on every corner to hold the crap that won't fit in McMansions.  We will never run out of stuff.  Not for a very long time, anyway.  (That's a big Fuckyo to China, in case they in ANY way think they hold all the cards.)

Get a copy of the Federal Directory and ask yourself what in the hell are we doing with so many agencies and commissions and departments that you've never heard of or benefited from?

The politicians are scared shirtless that we are about to find out that deflation is a good thing, and government is (at best) a necessary evil.

Wed, 10/09/2013 - 04:56 | 4037223 TweedleDeeDooDah
TweedleDeeDooDah's picture

"So, if we take in $2T and spend $500B on interest, we have $1.5T left for everything else.  Of course, the government has been spending TWICE that amount..."

 

Actually, 2012 was budgeted for $3.7 trillion, so it's better to say "two and one-half times" that amount, and everyone knows that two and one-half rounds up to three, etc...

But the most ridiculous thing is that you recommend paying just the interest... your credit card balances must be sideshow-worthy.

 

Pounding it right in China's rectum does seem like the best thing to do for posterity, and as a lesson to those who would keep lending in this manner. Thye should have expected to never see the principal a long, long time ago.

Wed, 10/09/2013 - 07:09 | 4037302 Serenity Now
Serenity Now's picture

Well, I tried to make it clear that I was roughly right rather than precisely wrong on the numbers, but my PREMISE is 100% accurate.

"But the most ridiculous thing is that you recommend paying just the interest... your credit card balances must be sideshow-worthy."

I did NOT recommend to pay just the interest!  I said that was our only obligation under the true definition of debt.  See, words matter.  Clarity matters.  As a matter of fact, I almost said in that post that we should be paying down the debt beyond the interest payments, but sometimes additional comments like that confuse people, so I was trying to keep it simple.

My credit card balance is zero.  My debt is zero.  So find someone else to bully.  And I ran my numbers again....they are correct, so fuck you. 

Wed, 10/09/2013 - 04:58 | 4037226 tvdog
tvdog's picture

Why should paying interest to bankers take precedence over programs needed by the people?

Wed, 10/09/2013 - 03:46 | 4037185 ebworthen
ebworthen's picture

Oh Lord, please let us default and hang all the malfeasant bankers, politicians, corporate parasites, and other useless toadies.

Amen.

Wed, 10/09/2013 - 09:09 | 4037541 kurt
kurt's picture

Better to give every 5 Mile trailer trash an ex-banker slave to wipe their stinky ass cracks and run to the pizza palace on a moped, chained.

Wed, 10/09/2013 - 04:53 | 4037221 falak pema
falak pema's picture

those whom the Gods wish to destroy they first drive mad.

So true in Pax Americana Washington.

Wed, 10/09/2013 - 05:28 | 4037243 Disenchanted
Disenchanted's picture

Will the football still be on my teevee? ..../s

Wed, 10/09/2013 - 05:39 | 4037246 Peter Pan
Peter Pan's picture

What is dangerous is not the a particular date coming and going because the USA can always make catch up payments for the most part.

What is dangerous, is the world waking up to the fact that the USA is getting itself out of its daily deficit by printing printing and more printing,

Wed, 10/09/2013 - 07:28 | 4037325 KidHorn
KidHorn's picture

I'm pretty sure the rest of the world is already aware of this.

Wed, 10/09/2013 - 06:03 | 4037256 luckylongshot
luckylongshot's picture

This ceates a nice little diversion from the big untold story of China getting out of US dollars. The timing is perfect too. What remains to be seen is how the inevitable collapse of the USD will be blamed on the public. More to come and all of it theatre.

Wed, 10/09/2013 - 06:28 | 4037267 FreeNewEnergy
FreeNewEnergy's picture

Paul Craig Rpberts says the Fed will lend to the Treasury if they need the money.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/10/8_Fo...

Great. The Ponzi goes on.

I don't know which way this is going to go but I'm prepared for any outcome. Got my guns, ammo, food, firewood, etc., plus have my inherited foreclosure home with the bank paying the taxes, AND, a rental (which I actually own) with welfare recipients living in it and I'm not paying the taxes on it.

If everything blows up, I'll keep my houses, but lose the rental income. worst case scenario is I get kicked out of my foreclosure home and move back into the rental (yeah, I kick the welfare folks to the curb) or move somewhere else because there will be deals galore. If they keep thing going the way they are (which, with the Yellen appointment looks like a solid bet), I just glide along as I've been doing.

Got to admit, I'd prefer collapse and every man for himself because it's more fun and exciting, but could we wait until after the winter is over? I enjoy making deals and fucking over .gov much more in warm weather. They'll kick the can some more. I'll hang in my foreclosure home and collect the welfare checks. It ain't perfect, but it sure beats working. Did I mention I don't pay taxes?

Wed, 10/09/2013 - 06:48 | 4037287 yrbmegr
yrbmegr's picture

Certainly default will end reserve currency status for the dollar. 

Wed, 10/09/2013 - 07:15 | 4037311 JamesBond
JamesBond's picture

Pass Cliton's budget -

No need to increase the debt ceiling -

I'm off to go  play golf.

 

Someone insert that into Obama's teleprompter 

 

 

jb

Wed, 10/09/2013 - 07:22 | 4037319 jughead
jughead's picture

Snyder should know better.  The only way we will default is if the President chooses to default.  Period.  If he does, fine, the house of cards was going to collapse sooner or later, might as well get it over with so maybe we can rebuild something decent for our grand kids, rather than passing the pain down to them like a bunch of wussies.

Wed, 10/09/2013 - 07:27 | 4037324 KidHorn
KidHorn's picture

The US gov't would delay interest payments, not default. I think it would be bad, but not nearly as bad as is stated in this article.

Wed, 10/09/2013 - 08:29 | 4037426 CharlesFilson
CharlesFilson's picture

 my post below: Treasury income = $250 Billion/month. Interest payments = $30 Billion per month. There would be no need to delay or default.

Wed, 10/09/2013 - 08:07 | 4037376 alamoillini
alamoillini's picture

Default

In financedefault occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan.[1] Default may occur if the debtor is either unwilling or unable to pay his or her debt. This can occur with all debt obligations including bondsmortgagesloans, and promissory notes. National default refers to the idea of an entire government unwilling or unable to pay a required national debt.

This will not occur unless Pres Obama wants it to occur.  The Fed, as was done in 2008 can provide all the short term liquidity needed without raising the debt ceiling and Pres Obama needs to NEGOTIATE as every other President and responsible leader has done in the past.   What will occur is that there will be extreme volatility, just like in 2008, until the Fed steps in and provides the necessary liquidity to stabilize the markets until President Obama starts acting like a President instead of a King.   

Looks like a great opportunity for short term long trade on VIX.

Sincerely,

Mark Marek

 

 


Wed, 10/09/2013 - 08:26 | 4037422 CharlesFilson
CharlesFilson's picture

There is zero chance of a default. The US Treasury takes in about $250Billion each month. The service on the debt is about $30 Billion each month. The treasury could pay the debt every month, and sitll have $220Billion with which to fund other functions of government. 

It's insane that we have gotten to a place where we need to borrow obscene sums of money every month just to buy all the crap we want. I couldn't run my personal finances like that. I say make the 17% shutdown (83% is still open) permanant, and keep the debt ceiling where it is. I'll be fine, and most people will either be just fine, or have to take jobs at lower wages which will increase US productivity. Sure the Market bubble will pop, but in the long run that would be a good thing as well. 

Wed, 10/09/2013 - 08:49 | 4037495 Took Red Pill
Took Red Pill's picture

Michael Snyder, you obviously are slanted to the Republican side. If we're ever going to unite and change the system, we need to quit taking sides and fighting each other. That's what they want. When more people realize there's not much difference between Democrats and Republicans, that the two sides work together more than we realize, then we'll start to see some real change.

Wed, 10/09/2013 - 09:30 | 4037603 Debt Slave
Debt Slave's picture

Yeah friends and relatives laugh at me for being a prepper. They won't be laughing when they are begging for a can of beans.

Wed, 10/09/2013 - 09:56 | 4037650 The Burning Planet
The Burning Planet's picture

I follow the charts. And there is an ominous Head and Shoulders pattern which was just activated. This pattern is better than 80% reliable. So we're looking at minimum 1000 point decline on the DOW.

Wed, 10/09/2013 - 10:05 | 4037688 The Burning Planet
The Burning Planet's picture

Just an anecdote but every single ATM at my bank was closed a few days ago. I went inside and did business with a real teller (first time in years) and she said they were ALL out of cash. Nice.

Wed, 10/09/2013 - 11:24 | 4037906 dadichris
dadichris's picture

What about the N.M.E (New 'Merican Empire) plan?

1. Position US troops 2. Default 3. In the ensuing chaos invade and seize all the key natural resources in the middle east, africa, and south america. 4. Declare Empire. 5. Put Americans to work extracting the natural resources.

LOL

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