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Federal Debt Default Woes Would Tumble Down Slowly But Surely to You

Economists say standoff on the debt ceiling will hurt anyone with investments - government, businesses or individuals.

Citing "a hundred variables," local economists say it's too soon to tell just what the local effects of a default on the federal debt would be – but without doubt, there will be dire effects felt at every level of society if Congress fails to raise the debt ceiling in a timely fashion.

Interestingly, under one scenario, the damage ultimately could hit as hard or harder in the suburbs - which tend to be more Republican -  than it would in city centers.

"It all depends on what bills the federal government would choose to pay, and on what the markets do," said Scott Drewianka, associate professor of economics at the University of Wisconsin-Milwaukee.

"In the first place," he said, "I don't think there's necessarily a disaster that happens if they don't meet a deadline on Tuesday. I think it likely that reality would set in pretty quickly, and they could do it within another week or so.

"The markets would react and, I think, demand that the government act.

"Now if, in the worst case, it should go on for some time, bad things happen that touch everything in the economy," he added.

If the federal government could not borrow, it would have to allocate the resources it has in hand to the most pressing needs - the "deep safety net," would have to be served, Drewianka said.

Consider:

  • About 20 percent of Americans – 60 million people, most of them families with children – rely on government-supported programs for at least part of their daily food needs, and already about 15 million Americans say that even with help their nutritional needs are not being met.
  • Tens of millions of older Americans and Americans with disabilities rely on Medicare and Medicaid for health care needs that would quickly become critical if support evaporated.
  • Tens of millions of Americans rely on Social Security payments to support their basic needs: food, shelter, clothing.

A Democratic administration that has already been criticized by its own left-wing base for even considering compromising those safety net programs would be extremely unlikely to let them falter in another economic downturn.

Milwaukee is just the sort of city where the effects of a collapse of federal aid would produce chaos, with perhaps half the population relying on some form of assistance from Washington.

Meanwhile, in the suburbs, few dollars flow in from the federal government – and those that do are mostly for transportation and other infrastructure. More money comes from state aid to municipalities, which has already been cut, and the repercussions of further cuts because of a loss of federal support are too far down the road to be seen.

"It would take some time for the effects to be felt, and it's too soon to say what they would be," said UWM emeritus professor of economics G. Richard Meadows. "The federal government defaulting would reverberate to the state, and I believe the state has said it would have several months in which it would be able to continue support of federal programs.

"Were that timetable to run out, then I think everybody would feel it. But it's too far away to say how," he added.

Most analysts warn that a default and the resulting downgrading of the federal bond rating would eventually echo to all levels, affecting states, counties, cities and every individual citizen with any kind of investment.

In an article in CNNMoney, economic reporter Jessica Dickler was succinct:

"If the U.S. loses its top AAA rating," she wrote, "the nation will no longer benefit from having the lowest lending risk and therefore, the lowest interest rates. That's where you come in.

"'The government's borrowing rate is the base line from which other borrowing rates are determined,' explained Greg McBride, senior financial analyst for Bankrate.com. 'Driving up Uncle Sam's borrowing costs is also going to drive up the borrowing costs for everyone else.'"

So, who would be hurt most in the long run by a plummeting stock market, a fire-sale of Treasury bonds, rising interest rates and inflation, as are widely predicted if a deal isn't struck to allow the government to continue borrowing?

Every individual and every institution that holds a portfolio.

"It's hard to imagine this happening, that the parties won't come to grips with what would happen," Drewianka said.

"Let's just hope we don't find out."

Lyle Ruble July 31, 2011 at 02:47 AM
@Gregg Wandsneider...They isn't anything confirmed as yet except that the Treasury will pay the interest on the debt. I think that is $78 billion. Currently revenues are somewhere between $150 billion and $200 billion, leaving anywhere between $100 to $150 billion shortfall. The current speculation is that social security will be paid, but nothing is certain.
Jay Sykes July 31, 2011 at 04:20 AM
@Pamela Ewing... This entire debt ceiling thing is just gamesmanship by both the radical right and the loony left crowd, in order to fire up their own base. FYI: the stock market is 2% higher today than it was four weeks ago; if the market performed like it did for the last 30 days, during the next 11 months, the Dow will be 1000 points higher than it has ever been!! Sounds like we'll all be way ahead in our retirement savings, by this time next year!!
Mira Bluesky July 31, 2011 at 02:54 PM
Instead of building the country Washington is destroying it, along with all hope for the future and trust in government. I don't care what party you are for, they are all in the pockets of the lobbyists and special interests as long as they get theirs, which they do in spades. Our elected representatives serve the global corporate government, not the people of the United States. If the Tea Party diehards think they are accomplishing something, theirs is a naive stance that plays beautifully into the hands of the the "rich without borders" controlling the game. Unless we the people realize we are ALL being sold out by Washington, we are doomed. We probably already are.
Thurston Howell III July 31, 2011 at 03:30 PM
Bush raised the debt limit a number of times. Why is this such a big deal now? Because Tea Baggers want to insure Obama is a one term president and don't care if the country goes in the dumper to achieve their goal.
Steve August 01, 2011 at 03:52 AM
Tea (Taxed Enough Already) party members, not a homosexual act. Much different group you are referring to.

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