If the government defaults, interest rates could skyrocket and
less reliable borrowers will have to pay higher rates on loans.
Mortgage rates would rise and hurt the weak housing market even
more.
Bond investors seem fairly certain that there will be a deal.
Nearly any measure to cut the deficit and debt load will hurt
economic growth. That means low inflation gets bond investors
to accept low yields. If Congress raises taxes to cut the
deficit, it means there will be less money for consumers to
spend. Government austerity programs mean laying off government
workers.
It is still interesting to note that the stock market has only
declined 1.7% from its recent high given all the speculation
surrounding the risk that the government may soon be unable to
borrow funds.
