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.
- 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.