The issue now is that there are "different" defaults. The first kind of default, which isn't a real default, just a technical one, is that certain bills do not get paid. I think this has become a likely scenario now, growing 5% to 10% more likely every 72 hours that we draw close to the Aug. 2 deadline. Let's call it 50-50 for now. The consequence? A 2% to 4% decline in the S&P 500 across the board
There is a second form of default, though, that isn't innocent and will lead to a bigger decline to the market, one that I shudder to think about. Let's call it the nuclear option. That's the one where the nation doesn't pay its bills. That's right, we don't pay interest or principal on the bonds. If we don't pay for one day, I don't think it can be contained by just 4%. We don't pay for three days, and I think the S&P can go down as much as 10%.
(A debt downgrade either way is almost a given, and that's part of the 2%-4% decline scenario.)
Why did this come about? What has changed? Speaker Boehner has lost control of his party. The deciding faction is the Tea Party faction, and they can be considered, for lack of a more diplomatic term, anarchists in this debate. They actually can be considered pro-default as a wake-up call.
The issue there is that the wake-up call will be felt around the world, and while we will have something that stops short of Lehman Brothers, we cannot afford to be complacent about this. I am giving the chance of this happening, and it will happen on Aug. 15 apparently, only 10%-20%.
http://www.thestreet.com/p/_jcblog/rmoney/jimcramerblog/11200260.html