No Safety

The prospects of a government default – somewhere – seems to get better every day. It could be Greece, Ireland, California, or Portugal – maybe all of them! So what happens when a government defaults?

First, the bond holders don’t get fully repaid – they lose money. Big bond holders like pension funds may not be able to meet their obligations. Big bond holders like insurance companies may have to raise their rates (health insurance – I’m talking about you!)

Second, a government which has defaulted will have difficulty borrowing money. If they can borrow, it will be at a very high rate. So, governments will have to scale back – possibly way way back. This will surely impact government employees. They won’t like it (see France) and they may strike and shut down government services. Remember Reagan and the flight controllers? A government scaleback could also whack various forms of transfer payments such as child care support, job training, affordable housing, health care, nursing homes, etc. This is in addition to such concrete services as security, transportation, and parks being diminished.

Will it come to this? Is the party really over?

No one knows for sure, but I think it’s safe to assume more austere times to come – for just about everyone.

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