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Will failure to raise debt ceiling shatter markets?

Will the failure to agree to raise the debt ceiling shatter the stock and bond markets?

Opinions among bond experts, rating agencies, and international creditors is that while the U.S.’s budget deficit must be addressed much sooner rather than later,  not raising the debt ceiling is considered the most damaging way to address the deficit problem.

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Opinions are split among domestic U.S. politicians in the government.   The degree of difference ranges from markets being disappointed to economic catastrophe.

Small business loans depot’s opines that what will occur in the event the debt ceiling is not raised is that it will be significantly closer to the dire economic assessment, certainly in the short term, certainly if the issue is not resolved within a day or two of the deadline set by the treasury.

Severe economic hardship over time will likely occur for a variety of reasons.

– Creditors, including China, Japan, Arab countries, the European Union to a significant degree are not interested in the internal squabbles as to why the United States might be delinquent on some of it’s obligations, their outstanding debt being one of those debts.   They certainly will have little sympathy or interest to the fight between specific political parties.   Creditors, upon the beginnings of a default will see this as a watershed moment for the United States in more than one manner.

First, the willingness of the country to pay it’s obligations.    Even if interest on bonds continue to be paid,   other obligations would have to go unpaid.    This could be infrastructure, military redyness, domestic transit, and payment on social programs such as Social Security, Midicare, Medicade.     Some politicians have stated that not raising the debt ceiling is not a problem because the country could continue paying interest to it’s creditors.    While that statement certainly is true,  saying or suggesting it would  not have much of an affect on overall is far beyond the pale.

At the first moment that soldiers do not receive a paycheck or Social Security, Medical, Medicade recipients do not receive their monthly payment, you can bet the screams will be so loud, the politicians will race to make good on this and all the previous statements about how we need to cut spending will be forgotten.   Certainly those not receiving their regular government checks suddenly will care far less about calls to reign in spending.

This scenario will take center stage on an hourly basis in the media.  The stock market will go down signficantly and quickly due to the uncertainty.   Media outlets reporting live stories with the lead “Is this the beginning of U.S. default?” will spook financial markets greatly.

This could lead to the some of the biggest fears being realized.    Moody’s and other bond rating agencies will lower the triple AAA bond rating of U.S.    If this were to occur, and even prior to it occuring, creditors, who now give the U.S. government between .30 and .35 cents out of every dollar it spends,  will not buy U.S. Treasury bonds paying the same interest rates treasuries pay today.    They will demand a higher rate of interest.   Possibly not just a slightly higher rate, but a significantly higher rate of interest, from now on as the bond ratings have dropped.

This would immediately require the U.S. government to use more of revenues it receives to pay out more dollars on interest on money it borrows.    This will significantly offset savings the government realizes on any cuts in domestic spending programs.

Foreign governments around the world will more agressively and confidently question the dollar as the reserve currency.    Why should, at that point, the world’s reserve currency continue to be from a country that is either unable or unwilling to meet it’s financial obligations?, will  be the question.

Not meeting an increase in the debt ceiling may be the excuse those that have an interest in changing from the dollar as the reserve currency will use to promote calls to move away from the dollar.     O.P.E.C. taking another look at the dollar being the currency it transacts in could lower the dollar’s value worldwide.

If the dollar’s value falls significantly, those holding large dollar reserves such as China and Japan may quickly lose tremendous value in their currency assets, not only upsetting these countries but also motivating them to begin long term selling off the dollar, further devaluing the dollar.    The U.S. stock market could suffer tremendously in this quite realistic and previously discussed scenario.

The U. S. economies modest gains would not only most certainly be lost, but the economy could easily slide into a significant recession with unemployment still in the 9% range currently.