One of the latest voices to warn of dire consequences of a US default comes from the International Monetary Fund:
“If there is that degree of disruption, that lack of certainty, that lack of trust in the US signature, it would mean massive disruption the world over, and we would be at risk of tipping yet again into a recession,” IMF head Christine Lagarde said in an NBC interview.
High interest rates alone could do the trick.
“The entire global economy rests on what is considered until now the safest currency, the dollar,” Reich says. “So the whole global economy can be expected to suffer.”
Another trigger could come from a stock-market crash that causes consumers worldwide to lose confidence and pull back on spending.
“If it gets to the point where Uncle Sam is missing debt payments, by that point we would have had a full scale market crash around the globe,” McBride says. “It would be one of those situations where there’s really no safe place to hide. For individual consumers, maybe bank deposits would be safe, but even then what good is Federal Deposit Insurance Corp. if the Fed is compromised?”
Naroff predicts that the value of the dollar would soon fall, which would in turn drive up the cost of imported goods.
McBride is less certain. While he recognizes that foreign investors could certainly abandon US assets, which would depress the dollar, he expects that marginal borrowers may shoulder the majority of the burden. “We saw the debt-rating downgrade [in 2011] actually reduce costs. Marginal borrowers were impacted the most,” he says. In other words, while US standing among the global community would certainly drop in the face of default, the nation’s current esteem is so high that there might be room to fall without crossing such a dangerous threshold.
Maybe.
Consumer, investor, and business confidence is hard to predict, and its effects on the economy and employment are not direct. Federal default could trigger an across-the-board credit freeze where lending would dry up, causing a chain reaction in which consumer confidence and spending could plummet leaving businesses with little choice but to lay off employees, McBride says. That’s a daunting picture, especially given the feeble growth since the end of the most recent recession.
Or the effects could be far more muted. No one really knows.
“We are on the verge of going to a place we have never been,” US Treasury Secretary Jack Lew told NBC’s “Meet the Press” recently. "We have never crossed this line.… Even getting close to the line is dangerous.”
