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Could debt default be like Lehman?

Monday, 7 Oct 2013 | 6:53 PM ET

Whispers on Wall Street suggest Congress may not get its act together in time.

That is, chatter suggests acrimony in Washington is so great that lawmakers may fail to find common ground before the nation runs out of money and defaults on its debt.

Jim Cramer is among those preparing for the worst.

"I now believe that we are going to have… a modified default," Cramer said.

If Cramer's right, lawmakers would propel the nation and the stock market into uncharted territory. According to CNBC's John Carney, nothing of this magnitude has happened since 1933, and even then, the circumstances were very different.

This ripple could be unprecedented.

A trader works on the floor of the New York Stock Exchange September 15, 2008 in New York City.
Getty Images
A trader works on the floor of the New York Stock Exchange September 15, 2008 in New York City.

"We don't know what the world will look like (after it happens). Cramer noted. And that's downright scary.

By some accounts a debt default has the potential to be as dire as the collapse of Lehman.

According to BusinessWeek, "The $12 trillion of outstanding government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008."

The resulting ripple would not only damage the United States, Cramer thinks it would ripple across other markets ultimately sending the world into a tailspin.

"Given the fragility of the globe's economies it is difficult to see how this stalemate doesn't throw the world into a recession," Cramer said.

At the 11th hour, it may only be President Obama who can prevent a catastrophe of this magnitude.

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He can either back down and negotiate with Republicans over the Affordable Care Act, which he's vowed not to do, or he can invoke the 14th amendment.

"The latter makes sense to me," said Cramer, "as it would force the Supreme Court to solve the problem and I bet the court sides with the President. If anything seems blatantly unconstitutional it would be the assumption by Congress that the country doesn't need to pay its bills."

Otherwise, if nobody blinks, chatter on Wall Street suggests lawmakers are fully prepared to sacrifice the full faith and credit of the United States government.

History and Cramer will be watching.

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