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Good question. The answer is that we should never confuse the fortunes of government with the fortunes of the people of a country. The UK stock market soared both in anticipation and for years following its 1934 sovereign default: its stock market performed far, far better than that in the US during the 1930s. More generally, the economic prosperity of countries has an inverse relationship to government spending as a percentage of GDP: this has been established in many economic studies. Hong Kong went 50 years with the smallest government sector on the face of the earth and no sovereign borrowing, and went from a poor third world nation to a country on par with the US in per capital wealth. Federal taxes long ago bumped up against a ceiling of 20% of GDP in the US, so default, as an alternative to inflation, and as a check on future borrowing, would represent a major reduction in the size and power of the US government. Yes, I would expect the stock market to soar in anticipation and in the years following a US sovereign default just as it did in Great Britain, and as Hong Kong shows is an unnecessary form of financing.

Keep in mind that the wealth of a country is in its goods and services, and not in sheets of green paper. American businesses, and businesses in general, will continue to produce the goods and services that constitute the true wealth of society, and we'll be just fine. In any event, we'll probably get a chance for several real life experiments involving city and state defaults before we get to the Treasury level. As most people know, Orange County, California defaulted on general obligations in 1994, and the county economy thrived. It isn't the end of the world, except for those who depend on political privilege and power.