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If the US defaults on its obligations, will I be impacted?

If the US defaults on its obligations, will I be impacted?

Published on Wed Oct 06 2021 06:36:23 GMT+0000 (Coordinated Universal Time)

Yes. Let's discuss how


We've been here before. According to Treasury Secretary Janet L. Yellen, the US government is rapidly approaching another debt ceiling deadline and will run out of money by October 18. Let that sink in…if congress does not act soon, the US government will run out of money in a little over 10 days. This is a big deal. Not only for the government and economy on the whole, but failure to raise the debt ceiling could prove catastrophic for your wallet as well.

Potential Impact #1 - Higher Taxes

This one is obvious. Failure to raise the debt ceiling will impact the government's ability to pay its obligations. Among some of these obligations include paying the interest on the US huge public debt, which was calculated to be over 28.43 trillion US dollars in August 2021; paying Federal, Military, and contractual employees; and payments for much needed social services like Medicaid and Social Security.  To try and meet these bills the government may be forced to increase revenue -- in the form of taxes.

Potential Impact #2 - Economic Slow Down

According to a recent Forbes article, “A mild recession would likely be the best-case scenario in the event that the US government defaults on its debts. The worst-case scenario would involve downstream effects: potentially cascading job losses, a shutdown in tens of billions of dollars in Covid-19 economic recovery aid still set to be delivered.”  

In addition, if Congress doesn't raise the debt ceiling, it could slow down that gradual improvement to the job market and reverse many of the gains made since the economy reopened. In fact, a report from Moody's last week reported that a default would cause nearly 6 million jobs to be lost, sending the unemployment rate back up to 9%.

Another consideration is that the US economy is the backbone of the global economy, and US government debt is one of the most widely held investment assets because of perceived low risk.  This would no longer be the case if the US defaulted. The impact of which could send global markets into a downward spin and negatively impact the greater global economy.

Potential Impact #1 - Cost of Money would increase

US default would also probably cause the Federal Reserve to adjust the Federal Reserve prime rate to reflect the increased inherent risk in lending money. This is important because consumer interest rates, for goods like a mortgage, auto loan or credit card, are directly related to the prime rate. This would impact nearly everyone in the U.S. with an interest-bearing loan.

In Conclusion

Given the magnitude of these potential impacts, congress will probably act soon to increase the debt ceiling. But the question now is when. "We know from previous debt limit impasses that waiting until the last minute can cause serious harm to business and consumer confidence, raise borrowing costs for taxpayers, and negatively impact the credit rating of the United States for years to come," Yellen warned.

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