Forget the skeptics, a U.S. default would be a very big deal

The biggest immediate threat, according to a new report from JPMorgan, would be a run on money market funds, which was last seen during the Lehman implosion - and required emergency help by the Federal Reserve. Money market funds (not to be confused with money market accounts like a savings account) are low-risk, low-return pools of liquid funds. They are not guaranteed by the FDIC, but they are required to stick with high-quality debt securities. If their value falls below $1, some of the original investment is gone and investors will lose money. This is known as "breaking the buck," and it happened during the dark days of 2008. In aviation parlance, it would be the equivalent of a catastrophic failure, and it helps explain why so many financial folks are freaking out at the prospect of Congress failing to raise the debt ceiling.

money-market.jpg

From Business Insider:

Of course, a default by the world's most stable nation would probably have impacts in ways nobody can imagine, but one thing seems to be clear. The notion -- as some people suggest -- that a default would somehow increase US credit-worthiness is absurd.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
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