Default
I fear that most people don't understand what will happen if the United States defaults on its debt. Something like this happened recently. Does this sound familiar?
Investment-fund managers who were required to buy only AAA-rated bonds had to dump their "good-as-cash" mortgage-backed securities when ratings firms lowered the ratings of these instruments from AAA → AA → A → BBB = junk. The (forced) increased supply and decreased demand of these bonds caused their prices to plummet. Firms that had bought mortgages using short-term loans discovered that they had no buyers for these mortgages. These firms folded when their loans were due, and they laid off their employees. The silliness of allowing anyone to buy unregulated insurance against these bonds (even if they didn't own any such bonds) destroyed insurance companies.
So what would happen today?
- The US defaults on its payments.
- Holders of Credit-Default Swaps for US Treasuries demand payoff.
So how bad could this be? Nobody knows because the industries that destroyed the economy the last time still are unregulated. Realize that the last time this happened, the situation was so bad that the US government had to bail out the affected companies using cash from selling US Treasury securities. Oops! Well, I guess that won't be happening. Buckle up! This could be a bumpy ride.