The thing I remember most clearly about the economic implosion the American people awoke to on Monday, Sept. 15, 2008, was the palpable sense of powerlessness. Some of the smartest people in the world were confronted by a situation they’d never before contemplated and were hard-pressed to come up with solutions — and fast — to save the global economy. For an accurate depiction of the time watch HBO’s adaptation of Andrew Ross Sorkin’s “Too Big To Fail.”
As the United States hurtles ever closer to an unprecedented default or downgrade of its credit rating — or both, I am struck by how many times I have read quotes from folks who should know saying that they don’t know what will happen in the markets if the United States defaults.
“]T]here’s a lot of uncertainty,” International Monetary Fund senior adviser Rodrigo Valdes told the Wall Street Journal yesterday about a potential U.S. credit downgrade. “Nobody really knows what would be the true effect.”
“It could be very bad,” Philadelphia Federal Reserve Bank President Charles Plosser told msnbc.com last week. It being the federal government prioritizing its bills if the debt ceiling isn’t raised. “At some level we don’t really know what the consequences could be. It could be very serious. It could be less serious. Do we really want to run that experiment?”
In a special report on the implications of a U.S. downgrade, Wells Fargo economists wrote, “There is little precedent to turn to for an indication of how markets and the economy might react to a downgrade.”
So far, the markets are not freaking out too much. But as the AP reports today, signs of a coming conniption are mounting. Another sign is the price of gold. When I wrote about what looked like a market reaction, the precious metal closed just above $1,600 an ounce for the first time ever on July 18. Today, gold hit an all-time high of $1,622.89 an ounce.
As far back as March at a Chamber of Commerce event, J.P. Morgan Chase CEO Jamie Dimon warned about the consequences of default. ”If the United States actually defaults on our debt, it would be catastrophic...and unpredictable,” he said. “If anyone wants to push that button...they’re crazy.” As we have seen in the last week, there’s a whole lot of crazy on Capitol Hill — consequences be damned.