The Catastrophic Consequences of a US Debt Default: What You Need to Know
The United States government is currently facing a potential default on its debt, which would have disastrous consequences for the nation's economy and financial markets. Treasury Secretary Janet Yellen has warned that the government could default as early as June 1 if legislation raising the debt ceiling is not passed. If the United States defaults on its debt, it would undermine faith in the federal government's ability to pay all its bills on time, affecting the government's credit rating and unleashing massive turbulence in financial markets. A US debt default would trigger a global recession, causing significant job losses and affecting economies worldwide.[0]
According to a recent report by Moody's Analytics, “the blow to the economy would be cataclysmic” if a prolonged breach of the debt limit occurs.[1] Moody's estimates it would cost the U.S. more than 7 million jobs, pushing U.S. unemployment to 8%, more than double the current rate. In Moody's worst-case scenario, an economic downturn triggered by a U.S. default would rival that of the global financial crisis. Up to 7.8 million job positions may be eliminated, causing stocks to plummet by nearly 20%, resulting in the eradication of $10 trillion in American household debt. Global markets would be affected by the spread of the contagion.[0]
The possibility of a U.S. debt default is increasingly becoming a tangible threat.[2] According to Janet Yellen, the Treasury Chief, it is possible for it to occur by June 1. Republicans in Congress are refusing to raise the debt limit unless deep spending cuts are made, laws addressing climate change are rolled back and work requirements are added. Unless the Biden Administration agrees to significant spending reductions to decrease the national debt, such as the severe cuts suggested in the Limit, Save, Grow Act, Republican leaders in Congress have declined to increase the federal debt limit. Although it is reasonable to be worried about the escalating debt, this suggested resolution fails to address the primary causes of the debt surge, which include unchecked expansion of Medicare and Social Security, as well as a tendency to implement significant tax reductions.[3]
Janet Yellen, the Treasury Secretary, has cautioned that if legislation to increase the debt ceiling is not passed, the US could face its first-ever default as soon as June. The International Monetary Fund (IMF) has cautioned that this may result in elevated interest rates for government bonds, intensifying the burden on nations that are already grappling with escalated borrowing expenses.[4]
The default of the US government on its obligations would have a significant financial effect on millions of Americans in a short period. About 66 million retirees, disabled workers, and others receive monthly Social Security benefits.[5] These payments could be delayed if Treasury doesn't have enough funds — about $25 billion a week — on hand.[6] According to 2020 census data, over one-third of households in the United States receive Social Security payments, while a separate one-third of households are under Medicare coverage.[6] Approximately 25% of households receive federal assistance for health insurance, whether it be for adults or children.[7]
The federal workforce comprises over 2 million civilian employees, in addition to millions of contractors and approximately 1.4 million active-duty military personnel, along with their dependents who depend on them.[6] If there were delays in their paychecks, the impact would spread throughout the economy.[7] About $25 billion in pay or benefits for active-duty military members, civil service and military retirees, veterans, and Supplemental Security Income recipients is disbursed on the first day of the month.[5]
Although the precise timing of the X-date remains uncertain, the Bipartisan Policy Center, a think tank, estimates that it will most likely fall between the beginning of June and the start of August.[8] Yellen has cautioned that the occurrence could take place as early as June 1, and the Republicans are putting themselves in a risky situation.
Investors care about stability and predictability, so a credit rating downgrade would send a chill down Wall Street's spine.[6] However, certain market pressures have already surfaced.[6] This month, the yields on Treasury bills have risen sharply for early June, which is when the Treasury Department may run out of cash and resort to extraordinary measures.[6] Interest rates on credit cards and mortgages would increase significantly as US debt is considered a crucial standard for different types of debt.[6] That leaves Americans having to pay more to borrow — on top of the Federal Reserve's own rate hikes.[6]
“A default would threaten the gains that we've worked so hard to make over the past few years in our pandemic recovery.[6] And it would spark a global downturn that would set us back much further,” Treasury Secretary Janet Yellen said Thursday in Japan, where she is attending a meeting of G7 finance ministers and central bankers.[6]
In conclusion, the United States government is facing a potential default on its debt, which would have disastrous consequences for the nation's economy and financial markets. Congress and the President need to come up with a better way to manage the debt to avoid this catastrophic outcome.[3]
0. “Should the U.S. Scrap the Debt Ceiling?” U.S. Global Investors, 12 May. 2023, https://www.usfunds.com/resource/should-the-u-s-scrap-the-debt-ceiling/
1. “Justin Bogie: Consequences of a U.S. debt limit default could be…” 1819 News, 9 May. 2023, https://1819news.com/news/item/justin-bogie-consequences-of-a-u-s-debt-limit-default-could-be-cataclysmic
2. “Hope for the Best. Prepare for the Worst.” Elliott Wave International, 8 May. 2023, https://www.elliottwave.com/articles/2023/05/08/20/28/hope-for-the-best-prepare-for-the-worst
3. “Defaulting On The Debt Could Be “Catastrophic” – Or Worse” Tax Policy Center, 11 May. 2023, https://www.taxpolicycenter.org/taxvox/defaulting-debt-could-be-catastrophic-or-worse
4. “IMF Briefing US Debt Ceiling / G7” TheNewsMarket, 11 May. 2023, https://www.thenewsmarket.com/news/imf-briefing-us-debt-ceiling—g7/s/4aed5dc0-44e2-4d68-a51b-0c072c3347c8
5. “If US defaults on its debt, Treasury would have to decide how to pay the bills” WDJT, 8 May. 2023, https://www.cbs58.com/news/if-us-defaults-on-its-debt-treasury-would-have-to-decide-how-to-pay-the-bills
6. “Here's how we know a US default would be an economic disaster” KTVZ, 11 May. 2023, https://ktvz.com/money/cnn-business-consumer/2023/05/11/heres-how-we-know-a-us-default-would-be-an-economic-disaster/
7. “Why we don't entirely know what would come after a US debt default” CNN, 9 May. 2023, https://www.cnn.com/2023/05/09/politics/debt-ceiling-x-date-what-matters/index.html
8. “‘It’s essentially a game of chicken.’ The debt limit standoff has no real winners and potentially one big loser: The U.S. economy” Yahoo Finance, 13 May. 2023, https://finance.yahoo.com/news/essentially-game-chicken-debt-limit-100000957.html
