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.

Treasury Bondholders

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.

Loan Borrowers

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.

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13 Responses to “What If The Government Does Default On Its Debt?”

  1. avatar Moneycone says:

    Another reason why US plays nice with China – if China decides to call on it’s US bonds…

  2. avatar Ravi Gupta says:

    You learn something new every single day.

    I was looking to put 5% of my Roth IRA into a Tips fund but now I’m reconsidering pending the debt ceiling. Thanks for the great post.

    -Ravi Gupta

  3. avatar Evan says:

    I have faith in America, but if we were ever to default the world would be in a SHIT storm. Think about what…what is anyone going to do? Attack us? The equity markets around world would collapse….Gold would go through the roof

  4. avatar Eugene Craig says:

    Just as Evan said this would be a great thing for anyone that has gold holding, but i dont think us being not able to borrow anymore would mean we can pay our interest payments. I think congress should pass legislation making it mandatory that the interest on the debt be the first thing paid for, and everything else secondary. This would cause congress to take a second look at their spending habits. We wouldn’t default, but just couldn’t borrow any more money atleast at the optimal rate that we get it.

  5. avatar Hunter says:

    Agree with Evan & Eugee: Gold would go through the roof, and rightly so. It would shake confidence in the US dollar so drastically that it would most likely be removed as the sole reserve currency. Further, it would erode confidence in free market economics. Hold on for a wild ride.

    A more plausible scenario is default by way of the back door. Inflation and/or reducing the valueof the dollar. The debt wll become easier to pay, but our creditors will lose, and so will the US standard of living.

    Oil is really big shock that is waiting in the wings. Can todays fragile economies survive this intact?

  6. If Republicans in Congress are dumb enough to block a vote to raise the debt ceiling, they definitely are not the party of fiscal responsibility.

    • avatar Steven says:

      Clearly, anyone that wants to rein in spending is not fiscally responsible. If fact, I constantly call my credit card companies and ask them to raise my limit. Now instead of cutting back, I just charge more. No more income coming in, but HEY! look at how much I can spend!!

  7. avatar JoAnn says:

    This is what happens when you vote a lot of nut jobs into congress who need to read the constitution to know what it says.I believe that the republicans and teafarters have a lot invested in gold and are willing to see this happen. It’s sad that the people who worked all they’re life while money was being taken out of their checks to have ssi to not have it anymore.To just vote them out in 2012 will be to late. they might want to change the voting laws by then.

    • I’m neither a Repulican nor a TEA Party member, but I support what they are doing. Reducing the deficit is critically important for America. That is why a majority of voters put these new people in office. I highly doubt anyone wants to shut down the country, to profit from gold. More likely, they just want to bring the government back to fiscal reality.

      If you have a better plan to reduce the deficit, I would love to hear it. Name calling and finger pointing are easy. Reducing a massive deficit isn’t. It’s going to take bi-partisan effort, like we just witnessed.

      • avatar itsnotrocketscience says:

        Are you kidding me? One . Just ask yourself ” when did the majority of this debt pile up” ? Any right minded man or woman knows the answer. It wasn’t in the past two years. Two. This is not a issue to play political games with. The congress has know choice but to raise the debt ceiling. Most of these nuckles heads in congress are not fiscally responsible. If you dont believe me do your research and find out yourself. What concerns me is , so many people are not bothering to educate themselves on the facts. If you watch TV for your facts. God luck! Set aside your political, religous, and personal feelings about someone or somethings and read the FACTS. This counrty has the ability to be so much better, but the ignorance, racism, and individuals ability to face the facts has hindered our progress.

  8. avatar Tom says:

    NO NEW DEBT CIELING!!! The Federal Government takes in enough monies every month to pay the interest and still pay out Social Security and several other areas. They would have to shut down a large portion of government and really tighten the purse strings. But after a few months of hardship for us all, we could start recovering IF we eliminate a lot of what the federal does and let the States decide what they want to do or not do. Pare the size of federal back and never allow them to spend more then they take in.

  9. avatar joe says:

    you talk about gold the only problem there is no gold in the us no fort knox we spent that all trying to bail us out last time and for china they will come and there will be world war 3 on american soil just wait it will becoming soon alot sooner than you think

  10. avatar Robert says:

    Paying off our debt…. Kinda scary when your as young as I am and you hear all this talk about a government shutdown. Many people say it would be easy to pay off our debt if we do shutdown. But if we have no government and the dollar is cut in half or more. How can we pay back our debt faster when the dollar is drops in value? If we have no government then it goes to the states. The states decide on what on what they want, what their laws are going to be, and can raise taxes without asking.

    You think its bad now right now just wait until the government goes away and all the counties that we borrowed money from comes to claim what is rightfully theirs. So I kinda pray that the do raise the debt ceiling. I pray that our government wakes up and finally grows up and they stop fighting like little kids and do whats best for the USA and I’m not talking about their pockets but the American people. Let them open their ears and listen to the American people. Their is a lot of people out their with good ides that voice what they think and are not heard

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