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A Cascading Failure

So, the day after Boehner staged his thoroughly political vote on raising the debt limit with a clean bill, that was designed to fail, it was the Worst day of the year for Dow, S&P 500. Basically all of the Wall Street casinos were down more than 2%.

It wasn’t just the debt limit. People are beginning to realize that things are not getting better and the news is bad all around.

At this point I would like to address something that doesn’t seem to be mentioned much – what happens when the government checks don’t go out. While everyone is concentrating on the effect on US bonds, no one seems to realize what is going to happen in the wider economy.

A lot of people receive government checks: government employees including the military, retirees in several programs including Social Security, government contractors, etc. The individuals have been encouraged over the years to shift to direct deposits to their banks, which is cheaper for the government, and safer for the individual, but that leads to the assumption that the money will be there on time, because it always has been.

What happens if Congress doesn’t raise the debt limit and the checks stop?

Anyone care to guess how many checks written because “the money is always deposited” are going to bounce? How many mortgages and loan payments are going to go unpaid. How many credit cards are going to get slapped with the 29.99% interest rate because of a missed payment? How many won’t have the money to buy their food or medication? How many businesses are going to fail because their customers can’t pay? How many government contractors won’t make their payroll?

Screw the bond market and Wall Street, Main Street is going suffer a huge blow, and a double dip recession is the best that can be hoped for. If the Republicans thought they took heat for the Ryan budget plan, they might want to avoid their constituents for an extended period if they cause the checks to individuals to stop.

On an individual note, there are several purchases I intend to make, but I’m not going to do it until this crisis is over, because I may need that cash to cover my normal bills. The uncertainty is reducing demand, and people are worried about their income.