Tags: Blinder Debt Default Issues Loom Large

Blinder: Default Threat May Spark Economic Havoc

By    |   Tuesday, 24 May 2011 08:50 AM

Financial markets are abuzz with concern that the U.S. government will default on its debt if Congress doesn’t raise the $14.3 trillion debt ceiling soon.

Former Federal Reserve Vice Chairman Alan Blinder says default itself isn’t his biggest worry, but the issues surrounding the possibility of default are.

For example, a 40 percent reduction in spending would be necessary to prevent government debt from rising higher. And such a cutback would wreak economic havoc.

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“That's an enormous fiscal contraction for any economy to withstand, never mind one in a sluggish recovery with 9 percent unemployment,” Blinder writes in The Wall Street Journal. “Even contemplating such a possibility is evidence of a dark, self-destructive impulse.”

In addition, “the U.S. losing its fiscal mind” would upset financial markets, the Princeton University economist says. “They'd be caught flat-footed if the threat of default suddenly started to look real, possibly triggering a world-wide financial panic.”

Moreover, if the threat of default is seen as a viable political weapon for Congress, “U.S. government debt will lose its exalted status as the safest asset money can buy — with unpleasant consequences for the dollar and interest rates,” Blinder writes.

He’s not the only one worried.

“If the United States actually defaults on our debt it would be catastrophic,” JPMorgan Chase CEO Jamie Dimon said in a recent speech, Bloomberg reports. “All short-term financing would disappear.”

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Financial markets are abuzz with concern that the U.S. government will default on its debt if Congress doesn t raise the $14.3 trillion debt ceiling soon. Former Federal Reserve Vice Chairman Alan Blinder says default itself isn t his biggest worry, but the issues...
Blinder Debt Default Issues Loom Large
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2011-50-24
Tuesday, 24 May 2011 08:50 AM
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