Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.Bloomberg
Failure by the world’s largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.
Items to consider.
- USG debt today is 23 times the outstanding Lehman Bros. debt in 2008
- The US stock market lost almost half its value in the 5 months following Lehman's collapse
- Yield on US 10 year bonds dropped to a two-month low on Oct. 3, showing investor confidence. BUT ... ten days before Lehman declared bankruptcy, Lehman bonds were trading at 95 cents on the dollar, the same as JP Morgan Chase bonds
- A USG default could freeze the repurchase agreement market, which is a form of secured loans used by a lot of Wall Street firms and investment banks. IF USG debt is no longer usable, a whole lot of supposedly secured loans are now unsecured, and all hell breaks lose
- Flirting with the debt ceiling in 2011 wiped out $6T in value from global stock markets - or nearly half the total USG debt
- The USG owes $120B on short-term bonds due 10/17; another $93B are due 10/24, and another $150B 10/31. Happy Halloween!
- About half of USG debt is held by foreign governments and other overseas investors. They may stop buying if we throw a scare into them
During the final days of Lehman Brothers, Wall Street firms set up war rooms to chart the potential impact of the firm’s demise and prepare strategies to cope with the consequences. Their scenarios, which focused on credit-default swaps, didn’t forecast the contagion that quickly spread after the bankruptcy.
Now, some banks are preparing contingency plans for a possible U.S. default, such as stocking retail branches with more cash, the New York Times reported last week. Those preparations might prove useless once again.
“Nobody knows what would happen if there were a default because the reality is there’s never been even a technical default in the U.S.,” said Russ Koesterich, chief investment strategist at BlackRock Inc., the world’s largest asset manager. “Everyone’s flying blind.”
So Tom Coburn and so on - don't be damn fools. Don't even pretend this is a weapon in your arsenal. It isn't.