Tags: Debt | Deficit | Economy

Experts: Default Would Plunder Average Americans

By Dan Weil   |   Saturday, 16 Jul 2011 12:55 PM

The debt-ceiling debate raging in Washington, D.C., could explode in homes across the country if worse comes to worst and it deals another blow to Americans already reeling from a dismal economy, a jobs vacuum, and escalating prices for consumer goods from soup to nuts.

Some politicians say the $14.3 trillion ceiling shouldn’t be lifted at all, although mainstream economists disagree, as debt covers 44 percent of the government’s spending, according to a Bipartisan Policy Debt, Deficit, EconomyCenter study.

And economists are unanimous on one issue: A default on Uncle Sam’s debt would be a disaster for nearly all Americans.

“It would mean that the average Joe couldn’t afford a cup of average Joe [coffee], let alone a cup of Starbucks Joe,” Robert Brusca, a veteran Wall Street economist who now is an independent economic consultant, tells Newsmax. “Default would bring the economy to a screeching halt.”

Anyone receiving financial support from the government — from Social Security to Medicaid recipients — is at risk. “Government checks could begin to dry up very quickly,” Brusca says.

“If the government doesn’t have the money, the Treasury secretary will decide who doesn’t get paid. If you’re receiving Social Security, you might want to send a nice letter to [Treasury Secretary] Tim Geithner” to make sure you receive your benefits, the economist notes sardonically.

The Treasury’s decisions on where to cut would hurt average Americans in all kinds of ways. “It might decide to shut down national parks,” Brusca says. “Maybe the government won’t pay air traffic controllers, shutting down air travel. Imagine what that would do.”

If Uncle Sam stops making payments on Treasury securities, a real risk of financial meltdown arises. Interest rates would soar immediately, economists agree.

And that would be “accompanied by even further restrictions in credit” from lenders, Joel Naroff, a veteran bank economist who now is an independent economic consultant, tells Newsmax.

“That means an enormous squeeze on consumers. Businesses that might have contemplated or begun hiring will more than likely put a hold on it.” Job offers that already have been made might be rescinded.

Employment growth already has slowed to a trickle, with the nation adding just 18,000 workers to its payrolls in June. With a default, that number would shrink further or even turn negative, economists say.

“It raises the specter of a double-dip recession. Other than that, everything is OK,” Naroff says jokingly. “It’s not something economists even want to contemplate.”

Eliminating almost half of the government’s spending money means drastic cutbacks. “Think about it,” Naroff says. “To use an economist’s phrase: It’s not a pretty sight.”

Anyone with investments in U.S. financial markets has something to fear. The Treasury market would tank. Low interest rates have played a major role in the stock market’s near-doubling from its low in March 2009. Thus, equities would take it on the chin, too.

Treasurys and the dollar traditionally have served as a safe haven in times of financial turmoil, but that equation likely goes out the window. “If you default, there will be no more [financial] security in the U.S.,” Naroff says. “Interest rates will be higher for an extended period of time.”

The damage won’t escape your local bank, either. “Banks would have huge losses, so that they wouldn’t want to lend to anyone,” Brusca says. “Banks would need a bailout.” As most people buy their cars with loans, the auto market probably would fall into crisis mode as well.

In dithering on whether to raise the debt limit, “these people [in Washington] aren’t just playing with fire, they’re playing with thermonuclear warfare,” Brusca says. “At a certain point, you have to raise the debt limit.”

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