It's no joke. The sky over the investment world and everything under it -- including bonds, stocks, money markets, commodities, you name it -- will fall unless lawmakers raise the $14.3 trillion federal debt ceiling by Aug. 2.
It would be nothing less than catastrophic, and worse than the financial meltdown of the late 2000s, should Uncle Sam fail to raise the legal limit on government borrowing and instead default on U.S. debt, according to Greg McBride, a CFA charterholder and senior analyst for Bankrate.com. "There will be no safe haven," McBride said.
President Barack Obama has called for compromise as party leaders seek to craft a deal that raises the legal limit on how much the U.S. government can borrow while slashing projected deficits over the next decade. Democratic and Republican leaders have been meeting, but discussions have faltered over taxes.
Obama says he will convene party leaders every day until a debt-limit deal is reached. He also says he would reject a stopgap measure of 180 days or less.
Congress has to raise the federal government's legal debt limit by Aug. 2 or the nation will be in danger of defaulting on its debt, Treasury Secretary Timothy Geithner has said. A U.S. default could throw the economy back into recession and create panic in global financial markets.
And the sad part is that most Americans (and lawmakers, for that matter) don't realize just how bad things will get if the United States fails to pay any of its obligations, even the teeniest, tiniest bill.
The crux of the matter, according to McBride, is that people on Main Street don't understand the consequences of lawmakers not raising the debt ceiling.
Here's what he sees as the likely scenario should the Obama administration and Congress fail to agree on a plan to raise the debt ceiling and compromise on deficit reductions over the next 10 years.
Rapid repricing of financial assets
First, there will be what McBride calls a "rapid repricing" of all financial assets, not just Treasurys. In other words, the value of your 401k plans, IRAs, 529 plans, gold and real estate will all collapse.
And the reason is this: Fundamental to the pricing of financial assets is the notion that U.S. Treasurys are risk-free. All financial assets are priced based on this assumption (or hope). If Treasurys are no longer risk-free, then all financial assets have to be repriced against another a benchmark.
And this time, investors won't have a safe haven to which they can flock as they did during collapse of 2008. "There will be no place to hide," said McBride. "Treasurys will no longer be safe in the event of a default."
Ditto real estate, gold and farmland. In short, there will be no flight to safety because no asset will be safe. Even cash might not be a safe haven.
