What Impact Could the Debt Default Have on the US Economy?

Losing at a site like online casino GG.bet may not be so bad, but if it is a “state” that is losing money, the consequences can be extremely serious. Did you know that this is almost a "traditional" situation for the US economy? Have you ever thought about what would happen if the federal government used up all its money one day? We answer this question below.

Let's Start with the Basics

Terms like “debt default” or “debt ceiling” may sound a little odd if you haven't heard of them before. Let's try to explain with an example. Imagine you are a teenager who receives pocket money from your father every month. Your father gives you $100 at the beginning of the month and says that's all you have until the next month. If you spend that money in the first 15 days, you won't have money for anything in the remaining 15 days. In this case, you have two options: you can do nothing in the last 15 days, or you can go to your father and ask for more money.

That's more or less how the federal government works. Every US President comes with his own projects, and the federal government has responsibilities that must be fulfilled on a regular basis – for example, paying salaries and providing benefits. These are called "legal obligations" for short. It is for both these obligations and the financing of new projects that the government is allowed to take a certain amount of money (debt) from the US Treasury – this money has a limit, called the “debt ceiling” or “debt limit.”

The problem is that the federal government's financial plan isn't always realistic. More often than not, money from the Treasury is wasted, and, like an irresponsible teenager, the government can prematurely spend the money it receives. When this happens, the government turns to the Treasury to increase the debt ceiling. Simply put, it wants more money. At this point, the Treasury has two options: it may or may not give this additional money. If it doesn't, this is called a "debt default." It means the government is unable to meet its legal obligations because it has no money left. Basically, it goes bankrupt.

This is something that happens more often than you think. Since 1960, the debt ceiling has been increased 78 times. Republican presidents made this request more often (49 times), and the Treasury approved the request each time. So, the debt default situation never happened. However, depending on when this approval is given, debt default may be valid for a limited period of time. For example, if the Treasury approves the request a month later, the federal government is left broke for a month. Even this situation can have devastating consequences.

A New Debt Default Is Possible

Currently, the largest banks and financial institutions in America consider the probability of a new debt default situation to be very high and are preparing for it. For example, the CEO of JP Morgan Chase made the following statement shortly: “Almost every time we come back from this scenario (talking about the debt default situation). Yes, the problem will be solved eventually, but for political reasons, it should not be allowed to get this far. The thing called the debt ceiling should be removed completely.”

So, what happens if a debt default actually occurs? This is exactly like a doomsday scenario, as any service that is paid for by the federal government becomes inoperable. For example:

• 15 million seniors cannot receive Social Security payments;

• Child Tax Credit payments, which 30 million families benefit from, will expire;

• The US military can't get paid;

• Federal employees can't get paid;

• Food assistance programs end;

• Health funds almost completely cease, which can have irreversible consequences on public health.

These are the consequences that will only occur within the US: a debt default can lower the credit score of the US, causing interest rates to rise. Such a development also changes the value of the dollar, and markets collapse, 401k funds become worthless, mortgage, car and credit card payments increase. Some analyzes show that debt defaults will leave 6 million jobs unemployed, plunge stock markets more than 30%, and the household wealth will fall by more than $15 trillion.

As we said, this could be a doomsday scenario.

For the same reason, this is never allowed to happen. If you visit the US Treasury's page on the debt limit, you can read why all requests for an increase in the debt ceiling are always accepted. Even the US Treasury states that such a situation will have “catastrophic economic consequences.”

At this point, we may have to ask ourselves the question: do we really need it, since the debt ceiling is constantly being increased and the opposite is unthinkable? There is no reason to still set a debt ceiling, right? Maybe things would run faster and more efficiently without it. However, these questions go beyond the purpose of this article: the reason for the existence of the debt limit, and why it cannot simply be eliminated is one of the most complex issues in the US economy.