What will happen if we default on August 2nd?

With Greece defaulting – not a “technical default” or “restructuring” as it’s being branded but a real live default – the stage has been well set for August Second if the USA does in fact default on it’s own debt.

I tend to percieve the sky as falling earlier than most because I grew up in an environment of political instability. That said, I worry that we have underestimated the incompetence of our legislators. They may not realize how serious the consequences are if we don’t do something – anything – to solve the issue coming up on August second. They rarely have to solve a problem that is truly time critical because – well hell we’re the United States of America and we set the damn clocks the way we see fit.

The rare instances of time critical decisions required from our lawmakers are usually related to war. Sad and cynical as it sounds, wartime is an incredible opportunity for any government to push through ideological agendas  – like the patriot act – that are enthusiastically adopted by opposing lawmakers and the populace while emotions run high and we’re willing to trade some liberty for some safety and another excuse to wave the flag.

But this isn’t one of those times.

Ideological forces are strongly opposed in our government and any decision is going to leave a bitter taste in everyone’s mouth. So no one wants to make the decision. Which is why I’m worried there may be no decision by August 2nd and we will be well and truly fookered.

What will the consequences of a default on August 2nd be? Here are my bullets and they’re all pure speculation:

  • Interest rates in this country will start to rise and continue for some time. Remember, the Federal Funds rate was over 20% in June 1981.
  • The housing market will start a double collapse due to a rapid rise in mortgage interest rates.
  • In the uncertain environment, housing sales will stall and the terrifying housing data in September, October and November 2011 will have a knock on effect i.e. home sales will completely stall.
  • This will precipitate what should have occurred in 2008 and 2009 had the banks not been bailed out. The assets underlying many of their creative financial products will drop massively in value causing many banks to fail, this time without a bailout.
  • Because the dollar is the world’s reserve currency and many countries are holding Dollars, US debt and dollar denominated debt, a world financial crisis of epic proportions will begin to unfold.
  • If ratings agencies actually downgrade US debt, the effect will be catastrophic. Many banks, countries and other organizations are required to keep a specific mix of risk on their balance sheets. This will force world-wide balance sheet restructuring as countries and companies move away from the US dollar or dollar denominated debt – specifically US government debt.
  • The dollar will increase the rate of it’s current slide.
  • Gold prices will hit $1800 in September/October and $2200 or more by year end.
  • Credit will once again dry up wreaking havoc among businesses and banks.
  • Expect massive layoffs world wide as businesses deal with lack of access to credit and batten down the hatches preparing to weather the storm.
So what good will come of this?
  • With a declining dollar, US exports will earn more money.
  • There will be a massive power restructuring in corporate America as incumbents fail by the hundreds, opening up opportunities for young, innovative businesses.
  • Some wealth will be transferred back from the wealthy holding US dollars to the true innovators in this country as the dollar declines and the value of exports increase.
  • Manufacturing jobs will return to the USA as it becomes cost effective for other countries to use our labor force and base operations in the USA.
  • Our politicians will be exposed as incompetent and old power bases and old boy networks will crumble giving way to new blood, new ideology and possibly a new political party in the United States.
I’d love to hear your  prognostications in the comments, good and bad, of what will happen if we don’t raise the debt ceiling by August 2nd…

60 thoughts on “What will happen if we default on August 2nd?

  1. so what happens to the public schools and local county jails, courts, and emergency response teams like the police, emt, ect… if the USA defaults?

  2. I have to wonder if the real problem we’re facing lies not in the shortage of money and thereby the inability to pay off our debt, but rather an issue with overpopulation. I’m only still a teenager so this may just come off as narrow-minded drivel, but the planet can only support half of what our population is today. And with an extreme lack of resources and America’s lack of exported goods, it doesn’t surprise me that it’s come to this. The question is, will anything our government tries to do be enough?

  3. One thing that will happen if we default is that businesses owned by members of Congress will be boycotted & picketed,just like abortion clinics. I just did all the work to set that up here. Sheriff protection will be in place. The signs will say:

    The man who owns this store bankrupted America

    Unless he backs off and votes with the President, we’ll see how long it takes to bankrupt Republican Congressman Scott Tipton. We’ll be out there next to his driveways every day, informing the public.

  4. So China has our high rise buildings our national parks and numerous railroads as colatiral for the money the us owes them so who’s to say the Chinese won’t get a bug up there ass and invade the country not only that if we defult the intrest rates on what we owe them will then rise how will we pay that if we can’t pay them now. When Argentina defulted there paso was worth next to nothing and had to start using the barting system. And then no other major banks would loan them money for a decade. With todays society if this were to happen civil uprising is bond to happen do u think inner city thugs will just sit back and wait for the gov to work things out they will take advantage of the situation and will try to over rule the local police and yes we will be practically a 3rd world country with no banks with money and the IMF dosent have enough to bail us out which last I checked they have only 200 billion for bailout I think this situation could possibly worse then what CNN and fox news let’s on I hope not but its possible.

  5. “well hell we’re the United States of America and we set the damn clocks the way we see fit.”

    Exact mindset which keeps getting you guys in trouble and not doing anything time critical, Frankly.

  6. One correction, the “Unemployment in the USA is just under 10%” number is a falsehood. After a relatively short period out of work you no longer fit the technical definition. The real US number is between 17% and 22%. Here’s the reason why, from

    http://www.valueline.com/Markets/Commentary.aspx?id=10133

    Worse, the aforementioned unemployment rate of 9.4% is just a fraction–perhaps half–of the overall jobless rate. That is because this so-called official rate includes only those considered to be technically unemployed. That is, those individuals, who are without a job, but who are actively looking for full-time work. This official unemployment rate does not include several other nagging jobless or underemployed categories that also are weighing on the economic upturn now under way.

    //

    These people are in much worse shape than anyone in Washington is willing to admit. I suggest that you reconsider whether homelessness & starvation are enough to rip the fabric apart.

    Then again, just in case you’re correct about your software business, where’s the open jobs listing? What languages / disciplines do you need?

    Thanks!

  7. well the terroristic millionaires im refering to is the anders behring breivic. he recently stated he wasnt alone on his opperations which i suspect is the truth he had a plan and knew exactly what he was doing. he wanted to be caught for some reason idk why he did but he is alot smarter than the press is leading on. i beleive more acts of mass murder could come soon. but thats besides the point at least its good to hear that its easier to be employed when i graduate and that it will be cheaper for me to be employed than a chinese graduate or somthing.

    • You should probably worry about working on your grammar before you try and look for a job.

  8. @mark Who will buy your software without any available credit & their bank account wiped out? The domino effect will “trickle up” on you much faster than you might think. Especially since so many businesses are already teetering on the edge of bankruptcy. A friend shut down last month, after barely hanging on the past few years.

    I was in LA for the 1965 & 1992 riots. The social fabric is a lot thinner than most people believe. It won’t take much before the streets erupt, too many are already in dire straits.

  9. and its no help that we now have a terroristic group of millionairs on the loose.

  10. well its good tp hear that the world isnt going to come to an end i didnt fogure it would but its still scary to hear about how our dollar will probably be devalued to 20cents. i just moved out etc just got started and then this economic deppression is about to take hold idk gow college woll be paid or anything anymore. it is almost demoralizing to watch all the news about this cuse i have no idea what’s gona happen

  11. so im curious to ask. with all this devestation and depression thats about tto hit the economy. do u think a mass migration of people panicking an fleeing the country wil happen? i mean in only 18 years old but i can already see this country could be close to the end. how will canada an other countries stop and take control of the situation

  12. I have tended to side with Mr. Soros’s opinion on economic and political matters, and his view is that this is a theater. He thinks the debt problems will be resolved in a timely way.

    However, I have a growing suspicion that on the Republican side there are too many strong agendas that would favour a default. For example, some way wish to undermine China’s position, or some may wish to undermine ‘socialist’ big government, or some may wish European banks to fold while they are still weak, and so on.

    As demonstrated horrifically in Oslo recently, it is easy to underestimate domestic nationalist extremism. Let us take the prospect of a US default with some seriousness, as there are certainly those that would take down the whole house of cards…

  13. Don’t be silly–the US Government is no absolutely no danger of default.

    Paying the interest on the debt takes 10% of income. No problem.

    The rest will have to be divvied up among the other piglets on the big teat. Some will get less than before.

    Problem solved. And about time.

  14. I believe this will make way to a new system. A resource based economy I believe will be the most promising and most logical solution to our problems. If we do not default and government does not go under we will be in the same fucking boat we are in now 10 years down the road if even that. I doubt people will riot or get violent the only violence will be what the government because they will not be able to control over the people. People I do not care what you think for I have studied human behaviors and understand why people become the way they are. For example if child was raised to be a good Jewish child he will grow up to be a good Jewish child. If a man was raised in a unsettling environment of violence such as abuse until you take that out of the equation you will have a violent aggressive person. Bigotry is learned at a young age and makes it hard to understand from right and wrong. We are all puppets we are all god damn slaves. Repetitious work needs to be phased out and rely on modern day technology. We have an ABUNDANCE of resources that we can develop alternative sources of energy. We peaked oil in the early 1980’s. This is not logical if we do not change as people we will die.

  15. Ironically, I think you are an optimist if you believe anything will happen other than crime, violence, and our descent into the status of a third world country. That’s what you view as the GOOD outcome.

    This is very scary. Who are those people we elected?

  16. You left out the food riots. The short term job displacement will be horrifying. Our inner cities will burn.

  17. Sebo, the problem are not the Americans!
    Americans are good people, always willing to help other countries, other people.
    The problem is the US government, that
    spends too much money,always meddling into other countries business, instead of taking care of it’s people, like rebuild the infrastructure, schools, etc.
    Why spend hundreds of billions in irak, afghanistan when they could use that money here!
    The US government is corrupt, it’s sad but it’s the truth!
    Eventually the dollar will collapse when foreign governments stop lending us money, then you will see a bank holiday, dollar devaluations, riots on the streets etc.
    But eventually things will get better, Americans are hard working people, innovators and they will recover.

  18. great point! I know people who take advantage of this country, don’t work, live on welfare, food stamps, have 10 kids they can’t support!

  19. great point! That;s why they recently passed the national defense authorization act to round up people when the dollar collapse, riots start, the ss check will not come!

  20. hopefully when everything goes down most people will be able to make it through without the government and free handouts. But there are alot of lazy people out there and most of them won’t make it. When the shit does hit the fan I’m taking my kids, my husband the bible and our necessities and heading in the mountains. Haha then we might ba able to live the way we were ment to live. God bless everyone.

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