First a default, then a depression? Some think so

It wouldn’t only cause a depression or another Great Depression, but the Greatest Depression.

Thursday brought a change to that trend, though, as investors heeded a dire message from President Barack Obama, who intimated in a CNBC interview Wednesday that Wall Street was taking the crisis too lightly.

Consequently, stocks sold off sharply and the Treasury Department warned of the dire consequences that might result from a full-blown debt default.

Picking up on that message, Bove said the situation could be more dramatic: A Depression that would cause severe and lasting economic damage.

“The devastation to the United States would be so severe that it would take decades to recover from the Depression caused by a default and the attendant dumping of trillions of dollars of U.S. Treasury securities on the global financial markets,” said Bove, vice president of equity research at Rafferty Capital Markets.

Bove also pointed to the Federal Reserve, which has been buying $45 billion a month of Treasurys that now comprise 54.5 percent of the central bank’s nearly $3.8 trillion balance sheet.

“A default in the Treasury debt would cause the value of these securities to plunge,” he said. “This would raise the question of what is behind the value of the dollar. Depending on the size of the decline it could wipe out the equity at the Fed.”

Though Bove is known for expressing strong and sometimes alarmist assertions, he is not alone in his default warnings.

In a public statement, the Treasury Department said default would be “unprecedented and has the potential to be catastrophic.”

Full article: First a default, then a depression? Some think so (CNBC)

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