What If The Government Does Default On Its Debt?
A big debate was just settled in Congress this past week as both houses of Congress argued over the budget for the last 6 months of fiscal year 2012. Congress was able to avert a government shutdown by reaching a resolution at the last moment. Now Congress must turn it attention to a larger fight over the 2012 budget and whether or not to raise the debt ceiling. Let’s start by taking a look at exactly what the debt ceiling is and some of the ways that it can impact you.
How much is the United States debt ceiling?
The current debt ceiling is $14.294 trillion dollars.
The debt ceiling is a cap on the amount of debt that the United States government can run up. The government’s spending totals are limited by the debt ceiling since it is impossible for the government to spend one dime over the debt ceiling unless raised by Congress. If the government failed to raise the ceiling, a large segment of the population would be affected.
If you own Treasury bonds, you would be severely out of luck. Failing to increase the debt ceiling would hit bondholders’ right in the wallet as they would be unable to receive interest payments. The United States would default on its bond payments and would see its credit rating fall dramatically. Investors would have a difficult time trusting the United States to honor its obligations and demand for long term United States debt would fall.
Social Security Recipients
The next group of people to be hit would be those individuals that rely on Social Security to meet their monthly bills. Social Security payments account for a large portion of the income received by many retirees and senior citizens that live on a fixed income. The loss of these dollars would likely further hurt domestic consumption in the United States and place an undue strain on the budgets of senior citizens.
The danger of default will lead to increased risks for owning U.S. bonds. Increased risks equal higher rates. Business loan borrowers and individuals looking for personal loans would see their borrowing costs rise astronomically. If you were seeking a home or auto loan, you should expect to see drastically higher rates since access to credit would be at a premium. Higher rates corresponding with a weaker dollar would further weaken the economy.
All of the aforementioned statements are the reason why Bill Gross is dumping United States Treasuries. Gross is the founder of PIMCO which is the world’s largest bond holder. Gross has turned sour on the U.S. Treasury market having sold or shorted $35 billion dollars in United States Treasuries over the past few months. He is not so confident that the United States will address all of its debt woes in time.
With the national debt now at $14.27 trillion dollars and a little over a month before it reaches its limit, the clock is ticking.