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"What if the Government Defaults?"

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posted on Jul, 24 2011 @ 10:39 AM

"Economic chaos: Massive unemployment, no credit, depleted savings, long lines at ATMs."

For those who think default is some game or should occur to punish the American people should read this:

But the consequences of any default would, ironically, actually increase the size of the government relative to the U.S. economy—the very outcome that Republican intransigents claim to be trying to avoid

The debt will increase, in other words

The reason is simple: A government default would destroy the credit system as we know it. The fundamental benchmark interest rates in modern financial markets are the so-called risk-free rates on government bonds. Removing this pillar of the system—or creating a high degree of risk around U.S. Treasurys—would disrupt many private contracts and all kinds of transactions. In addition, many people and firms hold their rainy day money in the form of U.S. Treasurys. The money-market funds that are perceived to be the safest, for example, are those that hold only U.S. government debt. If the U.S. government defaults, all of them will "break the buck," meaning they will be unable to maintain the principal value of the money that has been placed with them.

Imagine all the people who won't get loans or are in the middle of trying to get one

The result would be capital flight—but to where? Many banks would have a similar problem: A collapse in U.S. Treasury prices (the counterpart of higher interest rates, as bond prices and interest rates move in opposite directions) would destroy their balance sheets. There is no company in the United States that would be unaffected by a government default—and no bank or other financial institution that could provide a secure haven for savings. There would be a massive run into cash, on an order not seen since the Great Depression, with long lines of people at ATMs and teller windows withdrawing as much as possible.

Many business balance sheets will go bust and people will be scrambling for cash

Private credit, moreover, would disappear from the U.S. economic system, confronting the Federal Reserve with an unpleasant choice. Either it could step in and provide an enormous amount of credit directly to households and firms (much like Gosbank, the Soviet Union's central bank), or it could stand by idly while GDP fell 20 to 30 percent—the magnitude of decline that we have seen in modern economies when credit suddenly dries up.

No one will be buying anything for credit and few will have cash

With the private sector in free fall, consumption and investment would decline sharply. America's ability to export would also be undermined, because foreign markets would likely be affected, and because, in any case, if export firms cannot get credit, they most likely cannot produce.

There will be a domino effect on all levels of the economy as it comes tumbling down

The Republicans are right about one thing: A default would cause government spending to contract in real terms. But which would fall more, government spending or the size of the private sector? The answer is almost certainly the private sector, given its dependence on credit to purchase inputs. How much could it fall? Take the contraction that followed the near-collapse of the financial system in 2008 and multiply it by 10.

2008 will look like nothing in comparison

The government, on the other hand, has access to the Fed, and could therefore get its hands on cash to pay wages. With the debt ceiling unchanged, this would require some legal sleight of hand. But the alternative would clearly be a collapse of U.S. national security—soldiers and border guards have to be paid, the transportation system must operate, and so on. Issuing money in this situation would almost certainly be inflationary, but the Fed might conclude otherwise, because the United States has never been in this situation before, credit is now imploding, and the desperate credit-expansion measures implemented in 2008 proved not to be as bad as the critics feared.

So this is what a U.S. debt default would look like. The private sector would collapse. Unemployment would quickly surpass 20 percent. The government would shrink, but it would remain the employer of last resort.

The House and Senate Republicans who do not want to raise the debt ceiling are playing with fire. They are advocating a policy that would have dire effects, and that would accomplish the opposite of what they claim to want. A default would immediately make the government more, not less, important. The only law that Congress cannot repeal is the law of unintended consequences.

Whatever side of the political spectrum one is on or for the conspiracy Alex Jones types as well, this default is no joke, and the suffering and affect of it may not be anything desirable by sane people.

posted on Jul, 24 2011 @ 10:47 AM
We are in a no win situation. Raising the debt ceiling only delays the inevitable and increases the bondage of debt shared on every citizen of this country. Not raising it only brings about the results you have mentioned. It reminds me of a quote in an old tv commercial, " you can pay me now or pay me later!". No win situation here.

posted on Jul, 24 2011 @ 10:49 AM
reply to post by inforeal

There really is no shame in admitting you are bankrupt and cannot make good on your debts.

Still and all in the case of an individual it takes about 7 years before you are able to get any credit again whether or not you are good for it. Afterwards people always do look at you differently and rather than being a strong provider it is evident that you failed. You dug yourself into a ditch and you couldn't dig yourself out.

That is the way the rest of the world will look at the United States of America
afterwards and I think it may last a lot longer than 7 years.

posted on Jul, 24 2011 @ 10:50 AM
The package of spending cuts and tax rises that Obamas people presented seemed like the best course of action to take. At least inasmuch as nobody else has a better plan. And when you have a huge deficit, what you have to do is cut spending, and increase taxes.

The Republicans just seem to want to press the self-destruct button on the country.

posted on Jul, 24 2011 @ 10:52 AM
reply to post by micmerci

very true. it's obvious that the system is designed to fail and no one, NO ONE, in politics is interested in changing it, with the exception of a few brave ppl. if we raise the ceiling, we'll only have a bigger fall later. that's how i understand it, i say let it fall. let's start the revolution.

posted on Jul, 24 2011 @ 10:56 AM
Its near agravating to see and read, in the news, our own government lends or gives millions of dollars to foreign countrys, to help them or byt odays terms 're develop' 3rd world countrys in the name of globaliism and/or corporate interests, yet it cannot and never made attempt to pay its bills, like us taxpayers are threatened too. yes threatened...we can have our own homes taken away, cars reposesed simply over the ratified fine print when sigining a bank document, aka derivitives, henry paulson you can thank for that* or be removed over one simple skipped payement* becuase jobs were outsourced or companys have done away with pensions and gone with decreased salarys* the CEO"s hored the money* dictatorship.
the pentagon too...could be why Eisenhower was warning the american public before leaving office int he 1950' watch the military industrial complex. he wasnt specific in what he meant..but maybe he knew, they were up to no good and money mall thinking spending ideas, that would have been exclusively at taxpayers expense. let alone occupation of the middle east just as nazi germany did to europe.
if ti defaults, then not only have they gone on overwhelming spending sprees at our expense, but have gotten away with it as scott free as a murderer doing so. goes to show, in this globalist society thier still trying to achieve, its US that pay in the end* people should have whoreded in masses at the federal reserve and put thier foot down NO MORE news, voting dosnt do anything anymore* your still going to be stepped on by the FED and governement, unless yuor actions take notice. fight back*

posted on Jul, 24 2011 @ 10:56 AM
This is simple political gamesmanship, nothing more.
There will be a last minute "saving" of the day, but Obama will be making some serious concessions.
Unless of course, this is the first step in changing the money supply and the creation of one world government.
Should that be the case, all bets are off.

posted on Jul, 24 2011 @ 10:59 AM
This reminds me of the hysteria in 2008 that led to TARP and all of the bailouts. I fell for it then, because the sky was falling and life as we knew it would be over unless we acted FAST...

The OP highlighting what will happen if we default is terrifying to me. I feel as worried as I did in 2007/2008, so it feels like we should do something to prevent default. In hindsight, however, didn't we all realize that what we did in 2008 was actually a mistake?

I am definitely NOT an economist, but I'm not confident that raising the debt ceiling is the right thing to do. It's hard to know, because of all of the gloom and doom predictions.

Damned if we do and damed if we don't? That's how I feel about this whole situation.

posted on Jul, 24 2011 @ 11:00 AM
reply to post by inforeal

"If there must be trouble, let it be in my day, that my child may have peace."
-Thomas Paine

I think this quote says it best. I would rather endure the hardships you speak of now and face this difficulty now than to wait until my children have to fight it instead.

Here's a man who knows what he's talking about. He consistently makes Bernanke look dumb.

posted on Jul, 24 2011 @ 11:01 AM
If the government defaults they will find a way
to blame it on the American public.

David Grouchy

posted on Jul, 24 2011 @ 11:02 AM
reply to post by Cynic

Could very well be a staged thing too. keep the public scared ( it works) people tend to go out and buy more, and things they dont need, if they can be duped into gullibly believing thier governemnt otld em be afraid..the end is coming as we know it* then, come monday, lets say...obama saved it all...debt ceiling raised* a tactic ide suspect, so he gets another dictators seat at the white house.

posted on Jul, 24 2011 @ 11:03 AM
I'm waiting for this searing heatwave to subside. Then, on a cool morning, (because I don't have a car) I'm going to walk to my bank (about) (8 blocks away) and remove all my cash from my checking account. Just in case!

posted on Jul, 24 2011 @ 11:08 AM
in the real world if we get in over our heads, smart folks dont go and get more credit cards they cut out spending they cant really afford (cut expenditures) and either work more hours or get a second job (increase revenue).

when you have a bunch of elite millionaires running the country, who have never had these simple economic lessons, that are rote for middle class and poor folks, you have a disconnect from reality that hurts everyone.
These wealthy politicians have no clue how to live on a budget. They are the jet setters of the world. spending is what they have done all their lives, budgeting is just something poor folks do...

posted on Jul, 24 2011 @ 11:08 AM
Theres plenty of money to pay our creditors, and pay SS benefits with just the money we take in every month. The Federal Governments problem is there isn't a lot of money to do much else. Once those obligations are paid, they will have to start prioritizing. It might mean certain agencies wont be funded and some of the 2.3 million Federal workers will get laid off. Some entitlements will be chopped and aid to foreign countries will likely be cut back.

Default will only happen if TPTB don't prioritize correctly. The parties can blame each other, but ultimately it will be whomever allocates the money who will be responsible for default, if it happens.

posted on Jul, 24 2011 @ 11:14 AM
The best thing to do is be reasonable not fanatic or boisterous about “ we should default and show em” attitude. This is the attitude of the Congressional members in the Tea party. The point is to remember that it is these Tea Party congress people who are totally responsible for this manufactured crisis . . . .They are holding the American people hostage with their fanaticism.

This default is in fact different from the Bush Tarp scam because in that case there wasn’t any default at risk, but in this case if you take a survey you will find that ALL economists from both sides of the political spectrum agree that default will be catastrophic on the economy and peoples lives.

posted on Jul, 24 2011 @ 11:23 AM
As much as I would like for the house of cards to fall (as hard as it will be) I know it is not going to happen.. the ceiling will be raised and disaster averted.. this is horse trading and brinkmanship at it's best (or worst depending on your view)

I did not believe we would be continuing kicking the can down the road this long and now I think it has got to the point they can not stop.

But what I do know in my heart is that until the system collapses we will continue circling the drain with no hope in sight.. I wait the day the system does fall so we can rebuild something better...

posted on Jul, 24 2011 @ 11:35 AM
reply to post by inforeal

They are holding the American people hostage with their fanaticism.

In that case, I say we surround them with Seal snipers. (Ready, aim.....)

(Note to Secret Service............"I'm just say'in, is all.")

posted on Jul, 24 2011 @ 11:53 AM
DEfault now and become 3rd world or...increase the debt ceiling and become 3rd world later. Sudden death or slow agonizing one?

Expect economic "miracles" as 2012 election rolls in, though. The puppet still needs to serve the masters.

posted on Jul, 24 2011 @ 12:02 PM
This is why paying off all debt and reducing your spending, including having a savings diversified in metals and cash will or may help. Also having stores of food and supplies for an extended period of time is a must. Thhis does not mean that it will save you as whatever you have will be a target, but it would be a good idea to see what they say about hiding and hoarding in the survival formums.

I like the way this thread Op was laid out in laymans terms because reguardless of those who are the haves or the havenots we will all be in the same boat as things even out after the initial collapse.

Food for thought and validation of the seriousness we all face sooner or later.

posted on Jul, 24 2011 @ 12:10 PM
Something I keep noticing is that they say they might need a short term debt ceiling raise now, just to push through the next while, but they don't want a short term solution.

They want to raise the ceiling now enough that they don't have to raise it again until 2013. They're already negotiating for the next raise :shk:

That makes it clear to me that they don't have any desire to get spending under control, if they're already talking about the next raise. The "talk" of controlled spending doesn't make any sense if the ceiling only always goes up up up up up.........

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