There Will Not Be Rioting in the Streets
It is possible that
will reach a point between August 2 and August 12, 2011 in which it will not pay interest and/or principle on its debt. This will be termed a default. U. S.
What will happen?
At first, not much. The financial markets have shown relatively little concern about a default. Business will take place as usual, with holders of
debt expecting and probably receiving continued interest on unpaid principle. The secondary market in U. S. debt will continue as before. Interest rates may rise, but not significantly. U. S.
Over the long run, government will start to shut down. Operations will go on furlough, but Social Security checks will like continue, indeed it may not be physically possible to program the computers to stop them.
The ratings agencies may downgrade the
debt. This will not be an issue. Relative to the risk of other sovereign securities, the risk of U. S. Treasury debt will not have changed. U. S.
Paul Krugman talks about the impact of a ratings decline and noted
the last time the raters downgraded a major economy’s government. Here’s the 10-year bond rate in
See the downgrade? (It was in 2002).
The point is that when S&P or Moody’s speaks, that’s not the voice of “the market”.