We have heard all this talk back and forth over the past couple of months about our debt issues. We are a country of credit cards and it doesn't stop at the mall. The US is maxed out on their credit limit and the United States is set to reach its $14.3 trillion debt limit on Monday, and will only be able to avoid default until Aug. 2, according to the U.S. Treasury.
This is big stuff everyone. We all turn on the news and talk about it over dinner and listen to the political posturing back and forth on the issue. But I can't stress enough how serious this for our country. Whether you are a donkey or an elephant you probably are frustrated with what the government spends money on. Billions on wars and foreign aid, billions on bailout programs and tax credits. Billions for everything. Well eventually those billions turn into trillions and that's when we have an issue.
Here are some of the things that have been said by our own Federal Reserve Chairman one of the smartest economists in our country. I'm not sharing this to scare you, but to rather make you aware that it might be time to watch your money and who you vote for.
Bernake's words this past week:
Federal Reserve Chairman Bernanke told a Senate committee Thursday that a failure to raise the debt ceiling could lead to a devastating financial crisis.
"The worst outcome would be one in which the financial system would again destabilize," saying such an event "would have extremely dire consequences for the U.S. economy."
According to various reports there is a serious of 5 events that could result in a debt default.
1) Treasury bond rates rise- The government defaults, credit rating agencies would downgrade the rating of Treasury bonds. A downgrade means the U.S. would have to raise the interest rate it offers for these bonds in order to get investors to continue buying them.
2) The stock market drops, potentially sharply- The financial services firm Janney Montgomery Scott estimates that a default would cause the S&P 500 index to lose 6.3% in value in three months.10 J.P. Morgan estimates the loss to be closer to 9%.11 Using the milder forecast:• The S&P 500 would lose 1,257.53 points or $756 billion in value.*12 This money would vanish and deal a significant blow to overall economy. • According to the Employee Benefit Research Institute, the typical 401K of an investor in their 50s at the end of 2009 had $139,932 in their portfolio.13 A 6.3% loss in the S&P 500 would cost this portfolio $8,816.
3) The dollar loses its "special status."- Since the dollar is the world currency and traded daily like a commidity, many may sell the dollar causing potential inflationary pressures. Exports would lose their value and imports would cost more.
4) Mortgage rates rise- The head of Pimco, the world's largest bond fund, said a failure to raise the debt ceiling would be "catastrophic-global investors would move money at the margin to countries that have their act together, interest rates might rise by 50 basis points overnight, the stock market would plunge". An overnight jump like that would add over $19,000 in cost to a mortgage over the life of the loan. This could devastate an already weakened mortgage industry and housing market.
5) Small business and consumer credit tightens and chokes the recovery. We will be right back where we started from with the credit crisis. This liquidity shortage would be a direct result of uncertainty and volatility in the markets. When there is economic uncertainty and volatility, credit gets squeezed because banks want to keep as much money in reserve as they can. This is what happened in the fall of 08. Let's not make it the Summer of 11 as well.
I wish I had an answer for this issue. The government entitlement programs don't get as big as they are without a lot of support and need, so in turn it becomes very unpopular to cut the programs. We know that politicians like to be popular. No matter what your stance is on the issue we need to raise the debt ceiling. Without a AAA bond rating we no longer have a dominate financial position in this world.
Please share you thoughts, comments, and ideas. We need to stop kicking the can down the road and fix this.
Comments (53)Subscribe to CommentsComment