In the early 1960’s US generals including Curtis LeMay put intense pressure on the late President John F. Kennedy to launch a preemptive nuclear attack on the Soviet Union. They argued that such a war was winnable. Fortunately for all of us President Kennedy did not agree with them.
Let’s fast forward to today and look at some of the Tea Party politicians behind the government shut down and the coming US government sovereign default. They honestly do not believe that a default is a big deal. They believe it will cause no problems in financial markets or human suffering worldwide. They sincerely believe that it will magically force the US government to drastically cut spending and start “living within its means.” In their minds they will go down in history as courageous visionaries who saved the US from fiscal destruction with massive debts.
My readers I have repeatedly warned all of that that a miscalculation is the most probable route to a sovereign default here in the USA. It looks more likely every day. We will not reach October 17 and have “all heaven and earth fall in on us.” It will be in November when this begins to happen.
My wife Elena is from Argentina. A few months after we got married in 2001, Argentina had a major strategic default on its debt. The Argentine peso crashed from 1 peso= $1.00 to 3 pesos= $1.00. Banks froze and depositors could not draw funds. Property values crashed. For example my wife owns a condominium in Buenos Aires. At the time of the default it crashed in value from $55,000 US to $18,000 US. (It has since recovered in value to $120,000 US.) Unemployment rapidly went up to 25% (Great Depression levels). A massive number of businesses failed. Social unrest was epidemic with angry mobs breaking into stores and looting them of everything. In some extreme cases people literally starved to death.
There was one saving grace for the Argentines. As a people they are politically liberal but fiscally conservative. As a rule, their number one goal is to buy a house or apartment with no debt on it. When this disaster hit, most people at least had a safe roof over their head. Families also stuck together and helped those in dire need. The government also made no effort to pay the interest on sovereign debt. Whatever money they had left was used to help the local economy.
Argentina is also a small country on the world stage. Their default had little or no impact on major world markets.
Now let us see how a US sovereign default would be different. First it would affect financial markets all over the world. One would see a stock market crash worldwide like the 1929 stock market crash that led to the Great Depression. Banks will freeze up and people will have no access to their funds. This will quickly cause turmoil as people will not even be able to buy necessities like food and gasoline. One might still have a job and your paycheck deposited in your bank account but one would have no access to the bank account.
The US government will fight to maintain its credit rating at all costs. This means that payments of principal and interest on the sovereign debt will have the highest priority. We could see defaults on things like Social Security payments, medicare payments, veteran’s benefits, unemployment checks, etc. The social net that Americans take for granted would collapse.
The US real estate market would collapse with housing values falling, perhaps, 50% or more. Unlike the people in Argentina, Americans have large mortgages on their houses. Literally millions will wake up one day and see that their house is worth a fraction of the mortgage balance. We could see massive defaults worse than 2007-2010. This would lead to the collapse of some of the mega banks as no bailout funds would be available.
We would start to see massive social unrest and violence. One needs to think back to the time of the Weimar Republic in Germany. The bad conditions there led to the rise of Hitler and the Nazis. An ultra right-wing or ultra-left wing party could rise to power.
Such a default would not lead to a smaller government, rather it would lead to a much larger government with strict limitations on personal freedom and civil liberties as we all live in “a martial law environment.”