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US Debt Crisis Likely to Hurt World's Lenders, Borrowers, Investors

  • Kent Klein

While official Washington remains preoccupied with a government shutdown, many experts are more concerned about another looming crisis. The U.S. Treasury Department says the government will run out of money to pay its bills by October 17 unless President Barack Obama and Congress agree to allow the government borrow more money. The impact would be felt by borrowers, lenders and investors around the world.

Five years ago, at the start of the Great Recession, investors raced to sell off their stocks, causing share prices to dive.

Today, retirees and investors like Paxton Baker are hoping to avoid another hit if the government defaults on its obligations. “I mean, I am a federal retiree. I depend on the government for my monthly annuity, and if they do not do that, I am probably not going to get paid next month,” he said.

Baker belongs to an investment club. He and his colleagues plan to withstand uncertainty by investing in stocks for the long term.

“Certainly, there would be an impact on investments, but I think we feel overall that stocks will continue to be a good place to put your money,” said Baker.

Sheila Cheek is an advisor with Edward Jones Investments. She is telling her clients to look at the long term.

“It may take time or it could be a quick recourse. But once again, keeping the long-range investment goals in mind will help you to smooth over a lot of the short-term volatilities,” she said.

A Treasury Department report says a default could freeze credit markets, devalue the dollar, send interest rates higher and possibly cause another recession.

That would drive international investors away from the U.S., according to economist Stan Collender. “All they know is, this solid rock of an economy, solid rock of a political system, seems to be shaking. And that has got to drop your confidence. It means that, if they are counting on the money to be repaid at the right time also, they may just say, ‘You know what, it is not worth the risk,’” said Collender.

To avoid a calamity, Congress needs to agree to raise the nation's debt ceiling. House Speaker John Boehner and other Republicans are demanding concessions from Democrats on spending and health care first.

"I do not believe that we should default on our debt. It is not good for our country. But after 55 years of spending more than what you bring in, something ought to be addressed," said Boehner.

Obama says he will not even discuss it. "There will be no negotiations over this. The American people are not pawns in some political game."

The damage from a default could last a long time, said Joseph Minarik at the Committee for Economic Development. "In all likelihood, that will affect the esteem with which lenders perceive the U.S. Treasury for a very long period of time. Trust, once it is lost, is very hard to regain."

Minarik and others are urging the nation's leaders to avert a crisis. "Don't do this," he said.

Meanwhile, Baker and his fellow investors are working to protect their assets in case the government fails them.