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Debt Deadline Approaches: Here’s What Would Happen If U.S. Defaults

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The Treasury department is warning that unless Congress raises the debt ceiling by October 17th the U.S. will run out of money. Simply put America won’t be able to pay its bills.

Under this worst case scenario Washington would be faced with decisions like whether to stop paying members of the armed forces, put Social Security checks on hold, or delay funding to local schools.

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The U.S. might even be forced to renege on interest payments owed to our foreign debt holders. Defaulting on those obligations would shake financial markets to a degree not seen since the Great Depression.

Members of the Republican party claim the Democrats are overstating the risk of default. Conservatives argue that the U.S. has more than enough to pay its bills well beyond the October 17th deadline. From this perspective raising the debt ceiling just enables the government to continue to increase spending with no accountability.

This is scary stuff but don't panic just yet. Here are three reasons why:

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- Even if Congresses misses the October 17th deadline the impact won’t be immediate and the United States won’t be bankrupt no matter what you hear.

- Since 1939 the debt ceiling has been raised an average of more than once a year. In almost every case negotiations went down the last possible minute.

- The number one risk to the U.S. economy is losing the faith of foreign debt holders. Leaders on both sides of the aisle know this would be catastrophic and, while they may take their time coming up with a compromise, the likelihood of such a default is remote.

None of this has to happen. There have been a few close calls, but the U.S. has never officially defaulted on its debt. Despite the rhetoric on both sides this remains a political debate rather than a financial disaster. Emotions are running high but there's still a long way to go before this crisis becomes a global catastrophe.

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