Beyond a default: Catastrophic calculations

Ezra Klein
WashPost
Friday, July 15, 5:56 PM

It’s easy to understand why the government will have more trouble borrowing if it fails to pay its debts. It’s a bit harder to see why ordinary Americans, the city of Pittsburgh, hospitals in Iowa, or medium-sized corporations will have more trouble borrowing.

But they will.

And their trouble borrowing is the primary way a default, or even something too close to it for the market’s comfort, could deal a body blow to the economy.

It all comes back to U.S. Treasury bonds, which are the foundation of almost all other financial products — the base of the global financial pyramid.

If the federal government’s borrowing costs rise, so will everyone else’s. Mortgages rates will jump, car loans will be harder to come by, universities won’t be able to float bonds, cities won’t be able to fund themselves.

(More here.)