What Will Happen if the US Defaults?

First off, we would like to start this post with a confident prediction that the US will not default. We believe that the posturing will cool down at some point, that common sense will prevail, that budgets will be tightened, ratings cuts will be avoided and that our lawmakers and leaders won't allow today's political issues to become tomorrow's economics class case study. However, what would happen if no compromise is reached and the US went into technical default?

Part of the problem is that so much uncertainty surrounds such a potential event, with negative impacts predicted, but not assured, both domestically and abroad. How would ratings agencies react? What would debt holders such as the Chinese and the oil exporters do? Would commodities markets linked to the dollar be impacted? How would borrowing costs be effected? Despite all of these questions there is some certainty about what technical issues could occur. Some of these are highlighted in this quick Wall St. Journal piece from earlier today.

UPDATE: Based on the large number of hits we have had to this post, it is clear that people are looking for a clear answer to this question. If anyone is qualified to give one it is probably Tim Geithner. Around the 1:15 mark of the Meet the Press video below he explains what could happen in the event of default (while echoing our statement above that this scenario will most likely not come to pass).

UPDATE 2: For more on this topic, including some indications the White House has given the business community that default is not as imminent as the media would have use believe, visit our new post here.

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