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July 23rd, 2011 9:33 AM by David W. Welch
Everywhere you turn there is a story about the debt ceiling talks in Washington, and the game of economic chicken our elected officials are playing. It sounds logical that the government should stop spending more than it takes in, but right now that would spell disaster to the economy. It also sounds logical that if the government needs to pay it's bills taxes should be raised to cover the costs. Again, raising taxes would slow or even stop an already slowly improving economy. While we cannot continue to spend more than we bring in as a country, we also cannot afford to default.
Financial people have long considered US T-bills to be the proxy for the risk free return. All investment vehicles carry some risk, but US Treasuries have long been considered so safe that they are virtually without risk of default. With that in mind, basically all other debt is more risky and priced higher. A higher price when talking about debt instruments, bonds and such means higher interest rates. If the "risk-free" proxy is no longer risk free, rates will go up significantly. This would create an instantaneous effect on all interest rates. Adjustable rate mortgages would go up as much as they are allowed, and rates on revolving credit such as credit cards would likely skyrocket.
The increased borrowing costs would effect everyone and every company. Making things worse is the likely devaluing of the US dollar that would accompany the default. The dollar would be worth less, so foreign goods would become very expensive. That includes oil, so forget about filling up the tank. Quite simply, if the folks in Washington cannot get their act together and come to an agreement to avoid default, the economy as we know it would change drastically overnight. It is time for both sides to put aside their idealogical differences and do what is right for America.
David Welch Real Estate Optimist, Orlando Real Estate, Any Home-Any Phone