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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 7, 2011 at 9:20 AM

How should average Americans prepare for the possibility of default

The reader email had this subject line: “emergency preparedness for national default.” And he asks, “How can an average American prepare for a national default?” In another America, this would seem like a question asked by a crank. The debt ceiling has been routinely raised for decades, preserving the full faith and credit of the American government. But in today’s America, congressional Republicans are playing a dangerous game of chicken, refusing to do so despite the Obama administration’s repeated concessions on spending and very modest demands for new taxes. Even the reliable suburban tory David Brooks is aghast, questioning whether the GOP is fit to govern.

The macroeconomic consequences are clear. If the debt ceiling is not raised, by the middle of August the United States will not be able to pay its bills. A de-facto default will start, cascading into the real thing. Soon, the federal government will be unable to borrow. Our cred with our creditors, including China, will be in tatters. We will destroy our invaluable position as the ultimate safe haven. The effect on the dollar, the world’s reserve currency, will be profound, and the systemic shock will bring on world recession. Whatever clever ideas are out there about President Obama being able to weasel around the debt ceiling, this is the reality.

The effects on average Americans will be profound. A record number are on federal assistance of some kind, from Social Security and Medicare to food stamps. All would eventually come to a halt. But that’s only the start.

The stock market will tank. There goes your 401(k), again. Because every asset you own is denominated in dollars, from your house and emergency savings to what lives in your wallet, it risks a devaluation. Your money will be worth less. Demand will plummet, driven both by the general economic downturn and the paralysis of the federal government, a huge player in the economy.

The gold bugs will say, “buy gold,” and the commodity boyz will peddle their remedies. I’m skeptical either will be immune and both carry risks to average investors. The way to prepare is to force Congress to raise the debt ceiling. Jobs and growth, not debt, are what most Americans care about. The richest nation on the planet is not “broke.” Because we borrow in our own currency and are backed by the biggest economy in the world, the federal government can continue borrowing, indeed borrow much more to invest in growing the economy. But only if Congress does the right thing.

Otherwise, we face difficult days ahead.

Today’s Econ Haiku:

Job growth may resume

But that growth is relative

Geologic time

Comments | More in Debt ceiling debate, Deficit, Politics and the economy

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