The United States is currently facing a potential debt crisis as lawmakers struggle to come to an agreement on raising the debt ceiling. If the country defaults on its debt, the consequences could be severe and far-reaching, impacting not only the US economy, but also global financial markets.
Historical precedent shows that the most common consequences of debt default include increased interest rates for loans, mortgage rates, and credit cards.[0] Americans could also see rates increase on established lending products with variable loans, including personal and small-business lines of credit and certain student loans.[1] Credit lines can also be reduced by issuers.[2]
In addition to these financial consequences, a default could lead to a recession and significant job losses.[3] Economists have predicted that a technical default, where the federal government fails to make payments for some of its responsibilities, would raise unemployment from 3.4% to 7%, while an actual default, where the federal government fails to make payments to US bondholders, would raise unemployment to above 12%.[0] According to Moody’s Analytics, if the default continues for several months, the United States may face a loss of up to 7.4 million jobs, with states such as California, Texas, and Florida experiencing significant employment declines.[4] At its lowest point, existing home sales would drop by 23% and housing costs would skyrocket by 22%, causing a significant blow to the housing market.[4]
A default would also have broad economic repercussions, leading to a recession that would affect the global economy and result in substantial job losses. The GDP could decline to levels that have not been witnessed since the Great Recession.[2] The global financial system is heavily reliant on US Treasury bonds and US dollars, and a default could lead to a loss of confidence in the US government and a global market panic.[0] This would result in declining asset prices and a disruption in international trade.[0]
As U.S. Treasury Secretary Janet Yellen recently noted, unless Congress raises (or suspends) the debt limit, the US government may run out of money as early as June 1.[5] Yellen has repeatedly urged lawmakers to act on the borrowing limit, warning that failing to raise the debt ceiling in time could result in a “catastrophe” for the US economy.[6]
While the probability of a default remains low, at least based on opposing lawmakers’ assurances that a deal will be done to raise or suspend the debt limit and the long odds implied by trading in certain financial markets, the situation is still cause for concern.[3] The duration of a global market panic would be determined by the severity of the US default and how quickly the US could restore confidence in financial markets.[0]
Previous debt ceiling negotiations were stalled under the Obama administration, marking a new standard of polarized political battles when it came to discussing the government’s spending budget.[7] During 2011, the House Republicans engaged in a prolonged struggle to reduce the deficit in return for an increase in the debt ceiling, which had the unprecedented effect of affecting the country’s credit rating.[7] Conversations came to a head two days prior to the Treasury’s announcement that the United States was on the verge of depleting all its funds.[7] That delay in voting to raise the debt ceiling affected the stock market and led to higher borrowing rates for the US that cost the country an additional $1.3 billion in 2011, according to the United States Government Accountability Office.[7]
With the current political situation in Washington, there is a decent chance that lawmakers won’t reach a compromise and the US Treasury will have to prioritize bond payments over other government obligations to prevent a default.[0] Policymakers must prioritize a resolution that safeguards the nation’s financial well-being and its citizens.[4] Defaulting would have disastrous consequences, and Congress must vote to raise or suspend the debt limit without conditions and not wait until the last minute.[7]
0. “What Happens if the US Defaults on its Debt?” Of Dollars And Data, 16 May. 2023, https://ofdollarsanddata.com/what-happens-if-the-us-defaults-on-its-debt
1. “What happens if the U.S. defaults? How the debt ceiling could impact your money.” CBS News, 17 May. 2023, https://www.cbsnews.com/news/debt-ceiling-deadline-default-impact-on-your-money-social-security-mortgage-credit-cards
2. “What Happens If the U.S. Can’t Pay Its Bills? ‘Catastrophe’” FOX 11 and FOX 41, 16 May. 2023, https://www.fox41yakima.com/what-happens-if-the-u-s-cant-pay-its-bills-catastrophe/
3. “What Would Happen if the U.S. Defaulted on Its Debt” The New York Times, 18 May. 2023, https://www.nytimes.com/2023/05/18/business/default-debt-what-happens-next.html
4. “US Debt Ceiling Crisis: Consequences for Economy and Social Welfare” FX Empire, 15 May. 2023, https://www.fxempire.com/news/article/us-debt-ceiling-crisis-consequences-for-economy-and-social-welfare-1346657
5. “Everything To Know About The Debt Ceiling, Possible Default On Treasury Bonds And Whether A Shutdown Will Happen” Forbes, 18 May. 2023, https://www.forbes.com/advisor/money/debt-default-faq/
6. “Janet Yellen is ‘bluffing’ about the government running out of money by early June, economist Danielle DiMarti” Business Insider India, 16 May. 2023, https://www.businessinsider.in/stock-market/news/janet-yellen-is-bluffing-about-the-government-running-out-of-money-by-early-june-economist-danielle-dimartino-booth-says/articleshow/100284738.cms
7. “What Happens If a Debt Ceiling Agreement Isn’t Reached” TIME, 14 May. 2023, https://time.com/6279707/debt-ceiling-agreement/