If GOP Forces a Default, Americans' Wealth Could Be Cut in Half

[FourScore]

Tue Oct 08, 2013 at 04:27 PM PDT
If GOP Forces a Default, Americans' Wealth Could Be Cut in Half
by Dartagnan

This time, it really is different.

"[Investors] believe that — as in the past — the fiscal showdown will end with a midnight compromise that avoids both default and a government shutdown," warned Nouriel Roubini on Sept. 1. "But investors seem to underestimate how dysfunctional U.S. national politics has become. With a majority of the Republican Party on a jihad against government spending, fiscal explosions this autumn cannot be ruled out."

Analysts have been chirping throughout this crisis that the chance of a default is "zero percent." That hasn't stopped them from calculating what the impact would be, and as the deadline approaches they are suddenly showing more interest in running the scenarios. Here's what could happen to your 401K, your IRA, or your kids' college funds if the Republican Party forces the United States to miss a single interest payment:

In a note to clients on Friday, Deutsche Bank's David Bianco wrote that he too saw a zero percent chance that the debt ceiling debate reaches the point where Treasury actually runs out of money and starts missing interest payments.

The language from Wall Street's experts reflect absolute certainty that the U.S. will survive the ongoing debate over the debt ceiling.

However, "zero percent" is the type of language that should set off warning sirens.

Interestingly, Bianco estimated that should the zero-percent scenario occur, the S&P 500 could crash to 850, about a 50% drop.

What's frightening about Bianco's forecast is not the scale of the decline. Rather, what's frightening is that he would go out of his way to present a scenario that had a "zero percent" chance of happening. Because zero represents an impossibility, in theory it couldn't qualify as a worst-case.

On the day Lehman Brothers collapsed, the S&P suffered the worst decline since the September 11th attacks. That drop was a mere 23% from the one-year high the previous October. Still, stocks lost half of their value.

A 50 percent drop in the S & P would, roughly speaking, cut the accumulated wealth of millions of Americans by half--or possibly more.

What that means in the real world is that if you spent thirty years building a nest egg, the last ten or so--thanks to the Republican Party--would have been wasted.

Put another way, if you saved up enough to send two children to college, thanks to the Republicans, now you will have the money to send only one.

That 4 bedroom house you wanted to buy? Thanks to the Republicans, you'll now be able to afford only 2-3 bedrooms. If you can afford the down payment, that is. Hope your kids like bunkbeds!

And the interest rate on your mortgage? Thanks to the GOP, that'll be around 10 percent, if you're lucky.

If you're ready to retire, thinking you've saved up enough of a nest egg, well, sorry. Thanks to the Republicans, you'll be working another 10-15 years. If you're able to, that is.

If you're looking for a job, good luck. Thanks to the Republicans, no one will be hiring, because no one will be buying anything.

As News and World Report notes,

Fewer customers, meaning less income, meaning less need for workers, which could mean Jane's hours get cut...or that, eventually, she would get cut altogether.

On a broader scale, says Faucher, this kind of cycle could wreak havoc nationwide.

"[Default] could very well push the economy back into recession: large job losses, big increases in unemployment, all of those things," he says. "People can't borrow. People won't be able to buy or sell homes, people won't be able to buy cars. ... All those factors will restrain growth."

A survey by Gallup showed that Americans’ confidence in the US economy plunged after the government shutdown. The Gallup index now stands at its lowest level since December 2011.

That's after the shutdown. What do you think will happen to consumer confidence after a default?

As Diaried here by JML9999 and reported by Think Progress, some banks have begun to stuff ATM's with cash in anticipation of a potential run on banks by people desperate for cash.

With just 10 days left to raise the debt ceiling and congressional Republicans threatening to force the government to default on its obligations, banks are taking some dramatic steps to prepare for the economic chaos that would result should the brinkmanship continue.

The Financial Times reports that one major U.S. bank has started stuffing its automatic teller machines with extra cash in preparation for a possible bank run from panicked depositors. The New York Times reports that another bank is weighing a plan to advance funds to customers who rely on Social Security and other government payments that could stop in the event of a default.

No one will be able to say they [link:http:http://www.bloomberg.com/news/2013-10-07/a-u-s-default-seen-as-catastrophe-dwarfing-lehman-s-fall.html//|weren't warned]:

Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.

Failure by the world’s largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.

And the predictions of the "zero percenters?" Well as it turns out, they're just making the default scenario more likely:

Nobody believes the country will actually exceed the debt limit — which is exactly why it might.

Oddly enough, despite all the predictions of panic, the stock market was down only marginally over the last couple of sessions.

Here’s the perversity of Wall Street’s psychology: The more Wall Street is convinced that Washington will act rationally and raise the debt ceiling, most likely at the 11th hour, the less pressure there will be on lawmakers to reach an agreement. That will make it more likely a deal isn’t reached.

The real problem with comparing a default scenario to past economic crises is that with a default, the wealth would not be coming back. The markets--and economy--would remain paralyzed for the foreseeable future.

If this really had a "zero percent" chance of happening, then there would be no need for Goldman Sachs to write:

If the debt limit is not raised before the Treasury depletes its cash balance, it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. We estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized). The effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly.

"Rapid downturn" is a euphemism for "Depression."

[ffr]

1. I think it's going to meltdown past our boarders too

It may be unthinkable, but nobody ever brings up war, as in world war. I'm sure the Chinese will not take kindly to Tea-hadists telling them all that paper they have from us is worthless.

There will be lots of blame. And unlike here in the U.S. the rest of the world doesn't have a 24/7 propaganda mouthbox like Fox. Every other country in the world will blame us and the dysfunctional government the tea-hadists have made.

[FourScore]

2. That sounds about right. n/t

[Warpy]

3. Yes, it will

The whole financial system worldwide is rickety as hell. This might be the one thing that causes the panic which will shut down the derivatives casino. If that happens, it will take everything with it for a very long time. The only way the banks will reopen is if they're nationalized, good luck to us in that department.

It's likely to take a crisis of that magnitude to get us meaningful changes, like strengthening laws like Glass Steagal into constitutional amendments, impossible for future cabals of rich men to get overturned.

Will this do it? I think it's unlikely to do more than crash the stock markets here and abroad while causing some countries to flee to the Euro, no model of stability itself. However, that is enough and I wouldn't want to be any of the 30 or so teabaggers responsible for it. Pitchforks, torches, tar and feathers will be readied in their districts.

[JDPriestly]

5. China will simply nationalize American-owned production facilities in their country.

They can do that. They are not emotionally or all that ideologically attached to the idea of free enterprise. Not like a lot of Americans.

They don't have the British tradition of private property. Not in the same form.

So, they will have no problem taking care of themselves. And all those stupid American investors who put their money, their trust and their future incomes at the mercy of foreigners -- too bad for them.

[jmowreader]

4. This is the ONLY reason the teabaggers won't be able to take the country into default

I am pretty sure (likelihood is 75 percent) that the GOP's rich donors have called their congressmen and told them, in no uncertain terms, "you will not allow my bonds to fall worthless."

If we ever needed the 1 Percent it's now; rich people are, with very few exceptions, invested in Treasuries to a significant degree. They're safe, or at least they were until the teabaggers decided to use the world economy as a hostage in their attempts to overturn settled law.

[B Calm]

6. It's time for republicans to take a little personal responsibility they preach

about!