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Will U.S. debt crisis crush our economy?

Mannequin holding red word Debt

Kai Ryssdal: Senate Republicans and President Obama made dueling appearances before reporters late this afternoon. They were talking debt limit, who's to blame, how much their side was willing to give -- all very much in the vein of he said, he said. Maybe it's just political posturing, maybe it's not.

Because there've been warnings aplenty of financial apocalypse if the debt ceiling isn't raised in time. In time, specifically, to head off a market panic. So leaving out the four horsemen for the moment, what might the warning signs be that such an apocalypse is upon us? Here's our senior business correspondent Bob Moon.


Bob Moon: So far the markets seem to be taking the dire predictions in stride. Reflecting that "what-me-worry" attitude, a Washington Times columnist mocked the string of deadlines from the Treasury Department, suggesting it's sounding a lot like "Barbra Streisand farewell tour announcements."

Barbra Steisand singing "The Way We Were": Tell me, would we, could we?

Good question: What might the first indicators be of an impending financial "apocalypse"? At Smith Moore and Company, analyst Julie Niemann would expect a sudden plunge in stocks, especially the most vulnerable.

Juli Niemann: If it does happen, then it's Katy bar the door, because you will have financial hysteria. The financials -- meaning the banks, the insurance companies, the brokerage firms -- you'll see those prices plunge.

At the University of Maryland, economist Peter Morici says interest rates would surge as investors stayed away from government bonds.

Peter Morici: They would anticipate that the Treasurys would not be paid, so they'd want a risk premium.

And to borrow from another Streisand song: "Watch Closely Now." Morici says the markets use something called credit default swaps to hedge their risk on investments. But until lately, there's been very little trading in such insurance policies for Treasurys, because they've always been considered so safe.

Morici: We might start to see a market for credit default swaps emerge, and the premium become quite telling -- we might start to see the kinds of premiums associated with countries in trouble.

At New York's Bank of Tokyo-Mitsubishi, managing director Chris Rupkey says there might be little warning. When the government came close to shutting down back in April, he points out, the markets didn't react until that night.

Chris Rupkey: People started to think like, oh my gosh, this could be something that could really happen.

If investors really started to panic this time around, Rupkey says by the time we realized it, it might just be too late.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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It is unlikely that bond interest rates will react until the crisis is upon us. Just look at where interest rates on Greek debt were just prior to the current austerity crisis. Gold prices going up - maybe, but gold has been on an upward trend for three years now. Credit Default Swaps - there's already a thriving market for that on Sovreign debt that keeps getting bigger the worse Europe's debt crisis gets. Bottom line - I don't think the markets will really "react" until the crisis is right on top of us.

Let's be even more clear: not raising the debt ceiling is like asking for a shot of flesh eating bacteria and then chopping that arm off while saying, I still got the other arm left.

Yes, let's be clear: even if the US keeps paying it's creditors and only stiffs own federal expenditures it will still drastically effect its credit worthiness. Which is the whole point of the piece.

Gold went up by over 1% today. Ppl starting to invest in safe haven already?? Maybe time for Soros and Buffet to get into gold???

Let's be very clear: even if the debt ceiling is not raised, the Treasury need not default on its loans. There's still enough revenue coming in to keep making payments. There's not enough to do that and keep running the bloated alphabet soup of behemoths the federal government has turned into, but if Congress won't increase the debt limit, the government will only default if the president chooses the Beltway over Wall Street.

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