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How a U.S. Default Could Affect You

By JLP | July 26, 2011

The analysis estimates that without authorization to borrow, the federal government would take in about $203 billion in revenue but have $362 billion in bills to pay.

Politics aside, read this: How a U.S. Default Could Affect You

According to the article, not raising the debt ceiling could “be big trouble for anyone who needs a car, needs a home or student loan, uses a credit card, has a retirement savings account or wants to travel abroad.”

What would happen if the ceiling wasn’t raised?

“”…choices would have to be made on what got paid. Interest on outstanding debt would take priority to avoid default and damage to the U.S. credit rating. Beyond that, should the government pay Social Security benefits but not the salaries of servicemen and servicewomen on active duty? Medicare and Medicaid payments but not federal workers’ salaries and benefits?”

I’m torn on this issue. I can see the short-term need to raise the ceiling but I also look at it from a personal finance point of view in that you don’t get out of debt by going into more debt.

Topics: Economics, Politics | 41 Comments »


41 Responses to “How a U.S. Default Could Affect You”

  1. Money Beagle Says:
    July 26th, 2011 at 9:55 am

    I just read that this would send people investing into commodities, meaning that the price of gold and oil would spike, meaning higher gas prices and everything else that depends on gas (pretty much all food, for example) would spike up.

    So, pretty much means that anybody who eats or drives would be screwed with inflation.

    I’m pretty sure I won’t be voting for a Republican or Democrat come next election.

  2. BD Says:
    July 26th, 2011 at 10:03 am

    From a personal finance perspective, you don’t get out of debt by refusing to pay your bills, which is what a default would mean.

    I think it would do enormous damage to the US reputation around the world; how can you consider yourself a superpower when your legislature can’t authorize payment on the budget they’ve passed?

  3. Retired at 40 Says:
    July 26th, 2011 at 11:13 am

    It’s all hype. A default will not affect anyone because there is not going to be a default even if there is one.

    This is all just spin to scare the politicians into voting the way they will be instructed to vote much like the TARP vote where martial law would be declared if they did not go along.

    It’s all a sham. Interest rates will not move because everyone knows it is a con.

  4. Dan Says:
    July 26th, 2011 at 11:44 am

    “I also look at it from a personal finance point of view in that you don’t get out of debt by going into more debt.”

    Please allow me to take a moment to point out the obvious: applying the rules of thumb of household economics to the economy of the entire United States is not a fruitful endeavor because the United States economy is not a household.

  5. Travis Says:
    July 26th, 2011 at 2:04 pm

    This is all a political circus that will be resolved right before the deadline – just like the NFL lockout being unresolved until right before camp.

    Last I saw the US had $73+ trillion in household/small business wealth and only $14 trillion in long-term debt. Not bad if you ask me.

    If we’re comparing the government to households, that’s the equivalent of a person having $73,000 in the bank with a $14,000 car loan.

  6. Wallace Says:
    July 26th, 2011 at 4:59 pm

    .
    .
    ” Imagine you had a pesky neighbor who somehow took out a mortgage on his house in your name– and by some legal trickery you were obligated to pay for it. Imagine watching this neighbor throw drunken parties, buy expensive cars, add more rooms to the house, and hire dozens of people to wait on him hand and foot. Imagine that he also managed to take out several credit cards in your name. One by one, he would max them out and then use your good name and credit to obtain another credit card, then another and then another.

    Each time, this neighbor would claim that he needed the new credit card to pay interest on the other maxed out credit cards. If he defaulted on those cards, your credit score would be hurt and when you wanted to buy something for yourself, it would be more difficult to get a loan and the interest you paid would be higher.

    Imagine that you mulled this over, and time after time, said nothing as he filled out more credit applications so he would not have to default on the other debt taken out in your name. Meanwhile, another shiny new Mercedes appears in his driveway…..

    …. At what point do you think you might get tired of this game ?

    And, even though you are left with no really good options, do you think you might eventually tell him to go ahead and default, just stop spending your money !

    This analogy demonstrates the position we are in with our government and the debt ceiling. The government has run up a huge debt in the name of the American people, who are sick and tired of being on the hook for it.

    There are no really good options left. Defaulting on a portion of the debt may not be without costs, but it is better than handing the government yet another credit card…

    No fair-minded legal system would hold you responsible for such a debt, and would instead cart your thieving neighbor off to jail. Yet Congress can impose liabilities on you, your children, and grandchildren without your consent, and even without your knowledge. ”

    (–Congressman Ron Paul, July 26th 2011)

  7. Jack Says:
    July 26th, 2011 at 5:35 pm

    There will be no real default. If the debt limit is not increased, there will still be sufficient income to service the debt and pay those who have earned the money — employees (including military), government contractors, even unemployment insurance. The FICA taxes coming in, along with the Trust Fund, are sufficient to pay Social Security.

    The rest of the Welfare State will die the death it deserves.

    A balanced budget, and the end of the Welfare State. What’s not to like? All we need are Republicans who have the balls not to increase the debt limit.

  8. Jack Says:
    July 26th, 2011 at 5:39 pm

    Here’s a real beauty from the article cited:

    Treasury bonds provide the floor for other lending — car and home loans, credit card debt and student loans, for instance. And because those loans are seen as more risky, the interest charged on them is higher and could rise faster than an increase in the rate on U.S. securities.

    The provide the floor because of their Aaa rating. If they are downgraded, they will no longer be used as the floor.

    If the feral government cannot sell more bonds, there will be $100B per month looking for other investments. Wouldn’t that cause interest rates to DROP?

  9. Leland Says:
    July 26th, 2011 at 6:04 pm

    Travis, one of the differences between this and the NFL is that both parties in the NFL negotiations were willing to fight for what they wanted.

  10. Blindfolded Monkey Says:
    July 26th, 2011 at 8:38 pm

    I understand wanting to get the debt under control but the dangers of defaulting on national debt are not hype. The world’s entire financial system is built on the reliability of the US. If the US were to start acting like a third world country and stopped paying its bills it would turn the global financial system on its head. I agree with the point that refusing to pay your bills is not the right way to get out of debt. The debate should be focused on limiting future purchases, not defaulting on debt.

  11. Sam Says:
    July 26th, 2011 at 9:02 pm

    Not to worry. We have 2 or 3 trillion in the Social Security Trust Fund, in a lock box. That will pay claims until 2030 or so – or so I’m told. Ok, enough with the sarcasm.

  12. Jack Says:
    July 26th, 2011 at 9:25 pm

    It’s a question of what our “bills” really are, Mr. Monkey. Welfare payments are not bills. Future Medicare and Medicaid expenses are not bills. The costs for services already rendered are. The employees salaries are — until you fire them. The military pay and retirement are. Payments to government contractors are also bills.

    Medicare and Medicaid can end now, and there is no default. There is more than enough money to service the debt, and pay our contractual obligations. We can even end Social Security and just cancel that debt completely.

  13. BG Says:
    July 27th, 2011 at 8:20 am

    “…We can even end Social Security and just cancel that debt completely.”

    What SS debt? Social Security (as in the trust fund) has over $2 trillion in surpluses. Social Security isn’t responsible for a single PENNY of the $14 trillion national debt.

    But yeah, lets kill Social Security (as in the benefits), but leave the Social Security TAX to balance the current budget. *sarcasm*

  14. Russ Says:
    July 27th, 2011 at 9:44 am

    Jack, no it would cause rates to rise. Yields on bonds go down when demand increases. If investors move to other investments (lowering demand) then bond yields will go up to attract investment.

    This is why there is typically an inverse relationship between how the bond market is performing and the equity markets.

    My question is what other options are significantly safer than US debt? Even if we go to AA instead of AAA, does it really matter? I think the ratings agencies are trying to redeem themselves for completely dropping the ball on the mortgage fiasco.

  15. Retired at 40 Says:
    July 27th, 2011 at 10:05 am

    I can’t believe people actually take this seriously. Do you believe everything you see on TV???

    I hope and pray that the markets actually move on this so that I can take advantage of the stupidity.

  16. Jack Says:
    July 27th, 2011 at 7:51 pm

    “What SS debt?”

    The debt that the government owes the SS Trust Fund.

  17. Jack Says:
    July 27th, 2011 at 8:04 pm

    “Jack, no it would cause rates to rise. Yields on bonds go down when demand increases. If investors move to other investments (lowering demand) then bond yields will go up to attract investment.”

    Work with me, Russ. People who invest in government bonds are looking for a safe investment. If bonds from the feral government are not available, where will they invest that $100B every month? Municipal bonds, perhaps? Well, that would drive down the yields on those. If those yields go down, that will push some investors into corporate bonds, lowering those yields, etc. Yields drop down the line.

    Demand for safe investments will not go down, but the availability of such instruments will, because the feral government will no longer be selling them.

  18. Russ Says:
    July 28th, 2011 at 9:43 am

    Jack: I get that which is why I asked the bottom part of my post. In theory, rates should rise if demand for treasuries wanes due to perceived increased risk.

    However, no one has really said what exactly is safer than US debt. Despite the posturing, it isn’t like the US is going to start bouncing checks.

  19. JLP Says:
    July 28th, 2011 at 11:06 am

    Excellent discussion. I wasn’t even aware there were so many comments because I wasn’t on my computer and for some reason, my AFM email was being sent to my BlackBerry.

    Anyway…

    I don’t think the U.S. will default. I think ALL of our politicians are playing a game of chicken. I do think that as the leader of our country, President Obama needs to act like a leader.

  20. Jack Says:
    July 28th, 2011 at 12:32 pm

    “In theory, rates should rise if demand for treasuries wanes due to perceived increased risk.”

    That’s not what we’re talking about. We’re talking about ending the SUPPLY of Treasuries. The demand for safe investments will not change. So the prices of other such investments will go UP, lowering yields.

  21. Retired at 40 Says:
    July 29th, 2011 at 11:03 am

    Nope. The price of other investments are going to go DOWN unless they are considered a very strong credit. There will be no demand for other issues because no one will want to touch them with a 10-foot pole.

    Treasuries are going to go up because of faith that the U.S. will not default.

    Treasuries will remain low because default shenigans will be feared to push the economy into recession which will keep rates low. But that will cause yields on other debt to rise due to fear of lack of payment.

  22. Jack Says:
    July 29th, 2011 at 12:48 pm

    “There will be no demand for other issues….”

    So what will they do with their money ($100B/month)?

  23. Retired at 40 Says:
    July 29th, 2011 at 12:59 pm

    What did they do with it in 2008? They sat on cash. Instead of a return on your money, you look for the return of your money.

  24. Jack Says:
    July 29th, 2011 at 1:36 pm

    Why would they sit on cash? Why would the fed’s not issuing new debt cause people to not invest at all?

  25. Retired at 40 Says:
    July 29th, 2011 at 1:39 pm

    Because they are going to be scared sh**less.

    This was a discussion about what would happen if the U.S. were to go into default. This has traversed into Jack’s Fantasy World. Let’s separate the two.

    In fantasy world, the U.S. defaults and everyone suddenly realizes that government spending is unnecessary. Medicare and Medicaid are ended as is SS. The people that depend on them are beamed up by Scotty to the Star Ship Enterprise and are never seen again.

    The treasury stops issuing debt altogether. Taxes are lowered to 0.1% (only because 0% would end taxes which would not pay for defense spending and all rocket scientists would be laid off) which immediately produces the revenues to pay off all debt incurred from all wars and the welfare state. The only spending which continues is on defense which keeps rocket scientists gainfully employed as the Welfare State ends but the Warfare State continues. Jack gets a raise as more government dollars continue to roll into his pocket but everyone else is shut off.

    Because there are no treasuries and we have achieved economic nirvana, all other debt becomes more attractive and rates drop.

    I agree with you entirely on this Fantasy World outcome. That’s how the world works in the Fantasy World.

    In the real world, the Ponzi Scheme of America locks up. Default results in a fear of recession. The longer it continues the further the stock market drops and the lower treasury rates go. All other rates go up as fear of default spreads. Treasury rates will only rise when we begin the death spiral.

    After a week/month or so, the terrified politicians can’t take it anymore and the debt ceiling is lifted. The treasury resumes printing, rates move up a bit and the stock market breathes a sigh of relief and begins to rally. What happens after that is anyone’s guess but it ain’t likely to be good for a while.

  26. Jack Says:
    July 29th, 2011 at 6:05 pm

    You keep talking about “default,” which is pure BS. The US will not default on its loans. Interest on the debt is about 5% of spending — about 8.5% of revenue. Default is simply not a rational concern.

    What I am talking about is simply refusing to go deeper into debt. Why would that scare those who buy bonds?

  27. Retired at 40 Says:
    July 29th, 2011 at 7:29 pm

    I agree. Default is not a problem. But supporting the Ponzi scheme is a big problem. That’s what is going to terrify everyone and for good reason.

  28. Jack Says:
    July 29th, 2011 at 9:49 pm

    Is this the same “Retired at 40″? Our going deeper into debt IS “supporting the Ponzi scheme.” Our going deeper into debt SHOULD scare investors. Our going deeper into debt is what will cause our credit rating to be downgraded, interest rates to increase, and potentially a REAL default.

    If we refuse to increase the debt limit, none of that happens, and the Ponzi scheme ends now.

  29. Retired at 40 Says:
    July 30th, 2011 at 8:31 am

    Yes, going deeper into debt is supporting the Ponzi scheme. That’s how a Ponzi scheme works. Our economic system is based on ever-increasing debt and spending. It fails without it.

    I don’t say it is a good thing. It is the reality. I’m not talking about how the world ought to be. I’m addressing the reality.

    As for a credit downgrade, it is of no risk to the U.S. Investors will still invest in U.S. debt because it has complete confidence that the Ponzi will continue. See Japan if you don’t believe it.

  30. Jack Says:
    July 31st, 2011 at 8:44 am

    So explain why our credit rating would be downgraded if we refused to go deeper into debt — but still serviced the debt — and explain why our credit rating would remain pristine if we continue the ridiculous spending and simply increased our credit limit.

  31. Retired at 40 Says:
    July 31st, 2011 at 11:35 am

    I haven’t said anything about credit ratings. Who knows, who cares what they would do. The credit rating agencies don’t matter when it comes to U.S. debt. They could downgrade us to junk and it wouldn’t make difference.

  32. kitty Says:
    July 31st, 2011 at 8:36 pm

    “Jack Says:
    So explain why our credit rating would be downgraded if we refused to go deeper into debt — but still serviced the debt — and explain why our credit rating would remain pristine if we continue the ridiculous spending and simply increased our credit limit.”

    Your credit rating goes down when you fail to pay ANY bill on time. It’s not necessarily your credit card bill, but other bills too. Because if you are a deadbeat on one obligation you are a higher risk.

    Same here. If the US doesn’t pay any of the bills even if it’s not the one for bonds, one can’t trust the US.

    “. Interest on the debt is about 5% of spending — about 8.5% of revenue. ”
    It’s not just the interest. It’s also bonds that are coming due. Also, the bill comes on a specific date. If you’ve already spent money on soemthing else by that date you can’t pay even if you get revenue on some future date.

    But again, if you don’t pay for your obligations even if it’s not bonds you are poor risk. Think “universal default”.

    Refusing to pay your bills isn’t the way of reducing debt. Unless you declare bankrupcy.

  33. Jack Says:
    August 1st, 2011 at 5:37 am

    Bonds coming due can be paid by issuing new debt of equal values, and the debt ceiling would not be exceeded.

    We are simply not obligated to pay other people’s bills. We are not obligated to pay for anyone’s college education. We are not obligated to pay for their future medical care (except the military). We are not obligated to hand out any more food stamps. No-one is OWED a Social Security check or a welfare check.

    The credit markets do not care about those things, only about whether the bonds will be paid on time. You are right that refusing to pay one’s debts is not the way to reduce debt, but refusing to take on more debt is the place to start.

  34. Retired at 40 Says:
    August 1st, 2011 at 8:19 am

    You can make anything work in theory. The Tea Party has been made to submit and agreed to run the Ponzi full blast. America lives to Ponzi on.

  35. Jack Says:
    August 1st, 2011 at 1:03 pm

    No, you cannot, even in theory, make work the idea that continually increasing the debt-to-GDP-ratio will not result in default.

  36. Retired at 40 Says:
    August 1st, 2011 at 1:09 pm

    The world economic system will eventually collapse and have to be re-invented. That’s baked into the cake. We just have to hope it happens after we are dead. All we can do is Ponzi for as long as possible.

  37. Jack Says:
    August 1st, 2011 at 5:32 pm

    No, we can fight against the Ponzi system and try to educate the fools who support it.

  38. Retired at 40 Says:
    August 1st, 2011 at 8:19 pm

    Everybody supports it, including yourself with tax cuts and defense spending. It’s all we’ve got. The only way to get rid of it is for it to collapse. After another depression, you might be able to get rid of it. But not before and not until you’ve lost everything you’ve got.

  39. Jack Says:
    August 2nd, 2011 at 8:47 am

    So we should increase taxes so that the system collapses faster?

    Defense spending? I don’t see that as part of the Ponzi Scheme. Please elaborate.

    And no, a depression will only make the problem worse. It was the Great Depression that allowed the government to start this socialist nonsense in the US.

  40. Retired at 40 Says:
    August 2nd, 2011 at 9:42 am

    You are a True Believer. Keep on believing.

  41. Jack Says:
    August 2nd, 2011 at 3:22 pm

    Let’s just say I will not go gently into that night.

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