A U.S. default would be catastrophic, what can an investor do?
A U.S. default would be catastrophic to your portfolio but so would selling before a deal.
Every investor should be afraid of a U.S. government debt default. But tearing a portfolio apart because of the risk of a default is risky, too.
A U.S. default would be catastrophic.
Even one day in default would harm the nation’s credit rating, and have serious ripple effects, including:
• Damage consumer confidence, and possibly the economy.
• Cause interest rates to spike higher.
• Hurt stock and bond prices.
• Wound the value of the U.S. dollar on international currency markets.
Already on Monday morning, 10 days before the default deadline of Oct. 17, the Japanese stock market has fallen more than 1%, and the value of the U.S. dollar has fallen sharply against major currencies. Futures on the Dow Jones industrial average were down 132 points at 7:30 Monday.
And default would be an inexpressibly stupid event.
The debt limit isn’t a law that prevents Congress from authorizing new expenses, such as building a dam or an aircraft carrier. And it doesn’t cover government activities that are largely self-funded –- including the Affordable Care Act, which is the reason for the current stalemate. Rather, it allows Congress to pay the bills on spending it has already authorized, from building leases to Medicare payments to interest and principal on the national debt.
It’s the latter that most worries the financial markets.
Treasury secretaries, both Democratic and Republican, are clear about how bad a default on the debt would be. Jacob Lew, the current Treasury secretary, said in a letter to Congress in September:
“The debt limit impasse that took place in 2011 caused significant harm to the economy and an unheard of downgrade to the credit rating of the U.S.. The drawn-out dispute caused business uncertainty to increase, consumer confidence to drop, and financial markets to plunge. If Congress were to repeat that brinksmanship again this time, it could inflict even greater harm on the economy. And if the government should ultimately become unable to pay all of its bills, the results could be catastrophic.
