(The first part of this report is based on email received from economics analyst Monty Agarwal via alerts@e.weissinc.com)
If history teaches us anything, it's that when even ONE major government defaults on its debts, economic chaos follows. The crisis unfolds in four quick steps:
FIRST, since a sovereign debt default would inevitably cause ALL bonds to crash, investors stampede for the bond market exits, dumping as much as they can as fast as they can.
SECOND, as the bond market reels, interest rates skyrocket and credit tightens. The rates on 30-year fixed-rate mortgages, auto loans and other long-term debts soar. Rates tied to short-term money markets -- on credit cards and variable mortgages -- follow.
THIRD, consumers -- whose spending represents fully 70% of the economy -- snap their pocketbooks shut.
FOURTH, corporate earnings and stock prices crater. As the economy hits the skids, unemployment soars.
Clearly, these events would be the coup de grà ce to an economic recovery as fragile as this one is. And they would almost surely transform a Great Recession into a Great DOUBLE-DIP Recession, if not worse, plunging us into the second bear market in three years, lighting the fuse on a second explosion in unemployment, and triggering a second surge in personal and corporate bankruptcies.
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