Experts Warn a Government Default Would be Catastrophic
“We are going to default one way or the other… Politicians may reach a deal, but in a year or two, things will be worse again.”
These were the prophetic words of legendary investor Jim Rogers in July of 2011 during the first debt ceiling negotiations.
Right on target, Rogers’ prediction of America in decline are really hitting home two years later.
A U.S. government shutdown was once unthinkable, but on October 1st it became a reality as bureaucrats used our functioning government as a pawn in their power-grabbing games.
And with an approaching October 17th deadline, now a government default is looking like a possibility as well.
Warren Buffett – The Canary in the Coal Mine
The Oracle of Omaha, Warren Buffet, was the first to plant the idea that we could possibly go over the October 17th deadline, if only slightly. “We won’t default but we could go beyond the deadline by a few minutes,” warned Buffet.
Up until this point it was unfathomable that politicians would not come away with a deal in advance of the all-important deadline, but if one of the richest men in the world says it’s possible — it’s possible.
Buffett’s statement was not only shocking but also opened up a new area of uncertainty.
What happens if we don’t get a debt ceiling deal by the 17th? The U.S. government’s interest payments on their debt will be due on November 1st, and clearly, if we don’t pay our bills at that point we are in default.
But this raises the question, if our government has 5 ½ times the amount of money coming in as that which needs to go out in interest payments, why in the world would we default?
The answer is that our dysfunctional government in all its wisdom could choose not to pay its interest obligations. This would the worst possible kind of default.
Think about it… A government that actually has the money to pay its most important bills, the payments upon which its reputation in the world rests, may choose not to pay.
Even with the latest swing in sentiment toward the possibility of a default, most experts do not expect the U.S. to miss an interest payment.
Warning: The Stove is Hot
But judging by the outpouring of public warnings in the media, it’s clear that the experts do not trust our politicians to do the right thing.
These warnings of catastrophe are akin to a parent warning an incorrigible child that if he puts his hand on the stove he’ll be burned. And with each warning one can notice a palpable level of incredulity that our “leaders” have let the situation go too far.
Mohamed El-Erian, the CEO $1.9 trillion asset manager PIMCO, remarked “I’m often asked by foreign businessmen how the U.S. government could be so irresponsible in letting a default become a possibility.”
“A default would be catastrophic for both the U.S. and the global economy.” El-Erian concluded.
The repercussions would be devastating and widespread. If the U.S. defaults, interest rates would spike up, causing stocks to be repriced downward. If interest rates spike up, bond owners would lose money as well.
Mortgages would cost more, and the housing industry would suffer. Banks would run into liquidity issues since there are hundreds of billions if not trillions of dollars in the overnight repo market which could come to a halt. As a result, people and businesses could have difficulty in getting access to their money. The world economy would instantly slow, likely causing a world-wide recession.
Fourteen Days in No-Man’s Land
The two weeks between Oct. 17th and Nov. 1 has become a no-man’s land that more people are coming to believe that we will traverse.
No one knows what will happen if we go beyond the deadline, only to arrive at a deal just days or hours before the interest payments are due.
Will the world markets react negatively if we go 1 minute over the deadline?
No one knows.
Unfortunately, it looks like our politicians are willing to take that chance.
Billionaire real estate investor Sam Zell said, “We have a reasonable possibility of default. This event is more serious than a shutdown. It’s everybody’s problem. The question is how do you get to the solution without getting bogged down by blaming one side or the other.”
Message to our President and Congress: America is speaking, are you listening?