July 21st, 2011, 12:56 pm
Not affected today != not affected tomorrow.What scares people the most is all the interconnections whereby default by party A causes defaults by parties B and C and defaults by parties B and C causes defaults by parties D, E, F, and G. Rinse and repeat. And it doesn't even have to be full default to have an impact. A lot of entities (e.g., insurance companies and banks) have AAA ratings only because they hold AAA USTs. If the US gets a downgrade, a lot of other entities get a downgrade, too. And even if a downgrade doesn't cause an immediate catastrophe, it means higher interest rates for everyone and a higher probability of future defaults if those entities can't afford those higher rates or those entities customers can't afford to pay more for the entities' services.For better or worse, too much of the global economy assumes a ready supply of cheap capital. If the cheap capital spigot shuts downs, a lot of things get much more expensive and precarious (e.g., government programs, housing, cars, company expansions, working capital, insurance, etc.).In other words, what rmax said!