Quote:
Originally Posted by Tom Bombadil
Given so much talk about default, it will be nice if some one with the expertise to provide some past precedence and insights on the consequence of a default.
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In case of a default by the US, domestic and foreign financial institutions like banks, insurance companies, pensionfunds, trusts etc. that have invested in US debt would fall in to financial trouble. That would risk contaminating the world's financial system again, much like what happened with the subprime mortgage crisis. This crisis could spill over to the real world by making it hard for firms to get loans/credits needed for normal operation causing recessions in many countries.
Also, due to investors losing confidence, the US credit rating would take a plunge, making it far more expensive for the government to refinance debt that is reaching maturity (which happens reguarly and is a normal process). Interest payments on the current debt would increase and take up a far larger part of the country's future budgets, severely lowering available funds for social security, medicaid/care and defense.
These consequences are so serious that a default will never be allowed. Currently it's a game of chicken between the administration and the republicans and who ever gives in first will have to make political concessions. If time starts to run out, pressure by corporations, the financial sector and other governments will become so high that both sides will have to play ball.
I'm curious what would happen if the treasury is forced to borrow without permission from congress. I'm sure it lead to some kind of constitutional crisis, but as an economist I don't know enough about legal matters to make a guess.