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Debt Debate: What Can You Do to Protect Your Money?

Comstock/Thinkstock(NEW YORK) -- The phones were hot Monday at America's largest 401(k) manager, Vanguard, in Philadelphia.  Main Street was calling Wall Street to ask what a deadbeat government would mean to their future.

"By and large," said Karin Risi of Vanguard, the biggest question is: What should I do with my portfolio? Should I get out? Should I reduce my equity exposure?

The stakes are high, and Americans know it. Stocks fell almost one percent Monday.

"Why are we even talking about a potential risk to the U.S. credit rating?" asked Kenneth Polcari of ICAP Equities on the floor of the New York Stock Exchange.  "This should not have happened."

Even if Washington avoids an actual default with a short-term solution, that could still be expensive, with credit agencies downgrading America's AAA rating, which would cost banks and then everyone more to borrow. Citibank is warning its customers, "The kick the can down the road path," now option A in Washington, "would not impress the ratings agencies."

"If they downgrade the U.S. Treasury, that will be the most significant downgrade in the history of rating agencies," said Jim Kessler of Third Way, a non-partisan economic think tank in Washington, D.C.

What would the downgrade alone mean to you?

Analysts forecast a six-percent drop in the stock market. The average 401(k) of $140,000 would lose $9,000. Mortgage rates would likely rise at least a half-point. That's a $19,000 hike on the average $172,000 home loan. And the overall economy would be hit with a one-percent drop in GNP, translating into 640,000 lost jobs. And that's just the immediate damage.

"I would compare it to a marriage where one spouse cheats on the other," Kessler said. "The marriage may survive, but it will never be the same again.  And if there is a downgrade on U.S. treasuries, our economy will survive but it will never be the same again, as well."

So should you move your money?

Several analysts told ABC News that, no, it's best to ride it out because it's too difficult to know when to get back into the market. But if you are just too nervous, foreign bonds in stable countries like Germany or Switzerland may be somewhere to ride the storm.

Copyright 2011 ABC News Radio

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