US debt default: five ways it would affect you

Here's a breakdown of how a default or near default on US debt would affect Americans.

By , Correspondent

3. Investors: shockwaves in the markets

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    Gordon Charlop, left, confers with a fellow trader on the floor of the New York Stock Exchange, Oct. 9. The stock market's reaction to the debt-limit crisis has been muted, but that can change rapidly.
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While market reaction to the government shutdown has been minimal, investors have kept one wary eye on the looming debt ceiling crisis.

If the federal government does default on foreign obligations, investors would surely react.

“Back in 2008, when TARP [Troubled Asset Relief Program] first got voted down, the stock market fell $1.4 trillion in one day,” says Greg McBride, senior financial analyst for Bankrate.com. “I think if you breach that debt ceiling, markets will go into a massive sell-off mode.”

That’s a daunting scenario considering the feeble growth seen since the end of the most recent recession.

As the country learned in 2008, a stock market crash not only affects institutional investors with large money market accounts who are equipped to wait out the market. “For individuals who own any shares of stock – if their retirement savings is in a fund, if they have a pension plan that has shares of stock – the value of those plans and shares of stock will decline dramatically,” Mr. Reich warns.

So why hasn't the stock market tanked? Many stock strategists assume that a last-minute deal will avert disaster. Even after Oct. 17, when the government runs out of authority to raise more debt, the US will still be several days from actual default. But the actual tipping point for investor confidence is impossible to gauge. Having lost it, there is no guarantee that investors will regain it once a deal is signed.

On the day the House voted down the TARP the first time in 2008, the Dow Jones Industrial Average plunged 777 points. Even after the emergency legislation was signed, it took a year and a half for the Dow to recover from the losses that ensued.

A small increase in the debt ceiling won't solve the problem, either.

“Short-term fixes only make us look more and more stupid,” Mr. Naroff says. “Yeah, it pushes investors off and at least for now the assumption is that the crisis will be eased. But that doesn’t change reality.”

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