swc65 wrote:Default has a very specific meaning (not servicing the debt or exchanging current liabilities for ones with less favorable terms to the creditor). This simply cannot happen-14th amendment, 200 billion in revenues/month only 29 billion in debt servicing/month= no technical default.
Defaulting on "obligations" is just scare tactics and equivication. It is another example of politicians being sloppy with language to scare people. A real default (i.e. rating of D or SD will just not happen).
Downgrades, on the other hand, could have a significant impact. Banks/money markets/retirement funds etc. are required to hold a certain amount of tier one capital. The choice asset for that is treasuries. If treasuries no longer met the tier one requirement, financial entities might (if they are under the required amounts without treasuries) have to replace that capital with something else. This means fewer loans and more dollars being held by banks which means less money in the real economy and lower velocity=lower GDP. Basically a repeat of 08 except the financial institutions would be "writing down" treasuries instead of mortgage backed securities. The Fed might respond with massive money supply expansion. This could actually help because the Fed could buy back treasuries at face value (pre-write down) and the banks would not have to suck money out of the real economy. Or, it might not work and we would have a crash even bigger than 08. The crash is highly doubtful because in the case of write downs of treasuries, the Fed has almost unlimited power to intervene and there are a million things they could do. Also, they could see this coming unlike 08 when they thought everything would be fine.
Simple loss of faith in treasuries could have the same outcome.
Add to that a pullout of capital from investors, worldwide, dumping Treasuries and other types of securities. The market will react harshly if they can't raise the debt ceiling. Call it what you will, but we all know the outcome.