US default would hit Americans' wallets
Updated: 2011-07-25 14:31
(chinadaily.com.cn)
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With the possibility of America defaulting on a debt payment just around the corner, Americans are hoping for the best but bracing for the worst. There are five ways a US default would hit the wallets of American consumers, said an article on the website of The Christian Science Monitor on July 24, 2011.
First, the US dollar would face devaluation, said the article. "In the wake of a default, the US dollar would fall against most of the major currencies. Consumers in the United States would pay significantly for almost all their imports – from toys to gasoline."
Second, the interest rates would be higher. Once branded a defaulter nation, said the article, the US would lose its coveted triple-A rating and have to pay a considerable premium to borrow in the future. "Consumers would also feel the sting of higher interest rates as the increased cost of borrowing money would quickly find its way down to the retail level."
Third, the threat of recession would loom larger, said the article. "Lending would slow as cash left the financial system, potentially ushering in another credit crunch similar to the one that helped spark the previous recession. Even if declining growth alone wasn't enough to send the economy back into recession, the resulting credit crunch would administer the coup de grace."
Fourth, the American government would have no choice but to raise taxes and cut spending. Even if a deal is made to increase the debt limit, said the article, America's foreign creditors are "cautioning against simply returning to business as usual" and demanding a credible plan to "close the deficit gap and to assure global markets that the US is serious about reducing its dependency on deficit financing".
Last, America would lose its global status. "The longer the brinksmanship in Washington drags on, the more international investors will question the safety of US government bonds. America's reputation as a sterling investment has already taken a hit, and this alone could see lenders demanding a premium to buy US debt in the future."