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The Debt Ceiling Fight: What Will Happen If the United States Defaults?

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Should the Congress be unable to raise the debt limit, the United States will default on its financial obligations. Such a default would have catastrophic consequences for many Americans, and the nation would be pushed over the edge into oblivion. A severe enough crisis could even lead to the declaration of martial law.

The government needs a little over $300 billion a month to operate, while its receipts are $180 billion, leaving approximately $120 billion a month in deficits that need to be covered. The U.S. treasury covers this monthly shortfall through the sale of U.S. Treasury bonds to the global financial markets. But its ability to sell these bonds depends on the credibility of the government itself—investors will only buy these bonds if they believe that America can pay back. If the federal government defaults on its payments, that credibility will be severely damaged. While some may still be willing to purchase U.S. debt instruments after a default, they will do so only at higher interest rates, and the value of the dollar would plummet.

In the worst-case scenario, global financial markets would start to dump U.S. treasuries en masse, causing a catastrophic global economic collapse as trillions in U.S. dollar-denominated assets would become worthless in a matter of hours. Not only would the U.S. be bankrupt, countries like China would go bankrupt as well, since many hold their wealth reserves in dollars. Of course, these countries could start to move preemptively, selling dollars and U.S. treasuries before the U.S. went over the edge. So the danger of a catastrophic selloff is possible even without an actual default—all that need happen is one major bank or government holding U.S. dollar-denominated assets starting to panic and selling those assets.

Domestically, especially affected would be those substantially dependent on government payments, such as Social Security, Medicare, and unemployment benefits, as most such payments would be cut off, including payments to military personnel. Many would also be cut off from their medications, as Medicare would cease to pay for their prescriptions. Tens of thousands of senior citizens would suffer heart attacks and strokes if left without their medications. Major cities would quickly be overwhelmed with the dying.

But a collapse of the dollar would affect virtually everyone through skyrocketing prices of gasoline and other imports, causing savings to evaporate in potentially a matter of days. A falling dollar would make imports vastly more expensive, and prices would rise dramatically, for most goods in America are imported or have imported components. A major rise in the price of gasoline would be especially dangerous, for it would cause a dramatic disruption in the nation’s economy through an increase in transportation costs. Rising prices would take a bite out of personal savings and deplete financial resources. How quickly this would happen would depend on the magnitude of the rise in prices and the fall of the dollar. In the worst case scenario, prices could reach hyperinflation levels: a loaf of bread could cost thousands.

Without funds, much of the federal government’s ability to respond would be eliminated. Large scale disaster relief, should cities run out of food, for example, would become impossible, raising the specter of mass starvation in urban areas. It is possible that marshal law would be declared by the president as the nation descended into chaos.

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About A. Jurek

A. Jurek is one of the editors at Blogcritics. Contact me at: a.jurek@blogcritics.org
  • Jeff

    Remember the 2008 financial crisis scare leading up to TARP being passed? Articles like this and the party line from Democrats and some Republicans feels eerily similar.

    In a nutshell, the argument is that we have to hand out more money we don’t have or else things get real ugly, real fast.

    I don’t buy it. First off, services would be cut first before debt obligations. That’s the way thing are set up currently. Bondholders would be safe, and in most cases be more happy since we would be more likely to repay bonds.

    Think of a household that is spending beyond its means and has significant credit card debt. Reaching the debt limit would result in less debt, and more focus on repaying current credit cards.

    Let’s have an intelligent debate, talk of real issues, unlike the politicians in Washington.

  • Leroy

    Bail out bondholders AGAIN!? Why? They’re the enablers of the reckless gamblers infesting our financial system! It’s utter madness to keep bailing them out. Let those enablers suffer this time instead of innocent bystanders who simply went about their daily business. All you’re doing is incentivising more people to abandon their productive jobs and get into the crazy gambler part of the economy.

  • Karthik

    Dumping the U.S. treasuries or fast selling will lead to hyper inflation in very short amount of time which will make a loaf of bread cost 500 USD. The entire financial market and global economy will come to a stand still as world trading is done in USD or US bonds.

  • jthe lion

    here is an idea; start putting the screws to these companies to start creating jobs! Tell them either A.) Start hiring and stop firing so that they can earn a paycheck, or B.) Loose tax incentives and get their taxes raised. If companies choose A, the people that are hired will be able to contribute by paying taxes, if they choose B than government will bring in more revenue.
    If these people can pay their CEO’s millions of dollars a year, then they can pay more in taxes. CEO’s are paid that money for being able to run a company profitably through creativity. It does not take any special talent to just fire everybody, and send those jobs to Mexico. So we must start forcing these ass holes to start hiring people. They keep getting richer while they tank the economy. I think it is only fair that they pay for it. If you walk into wall-Mart and start breaking stuff, you better believe you will be forced to pay for it. I say we hold them just as accountable. If they break the economy they can pay to fix it.

  • Sam

    How many people have actually taken college level economics?
    I noted this was going to happen years ago. I started buying gold back in 2003 at $450 an ounce. It is now $1,627 an ounce. Anyone want to say that’s not smart?

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