What would happen if the US defaulted on its debt (2023)


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Investors, executives and economists are preparing contingency plans as they consider the turmoil that would result from a US Treasury default on the $24 trillion market.

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What would happen if the US defaulted on its debt (1)

ByJoe Rennison

(Video) What Happens If The US Hits The Debt Ceiling And Defaults | Insider News

The US debt limit has been reached and the Treasury Department isfind ways to save money. With the maneuvers exhausted, what previously seemed unfathomable may become reality: the default of the United States.

What happens next?

The far-reaching effects are difficult to predict: from shock waves in financial markets to bankruptcies, recession and potentially irreversible damage to the nation's long-standing role at the center of the global economy.

The likelihood of default remains low, at least based on assurances from opposing legislators that an agreement will be reached to increase or suspend thedebt limitand the long odds implied by trading in certain financial markets. But as the day approaches when the United States starts to run out of money to pay its bills - which can beas soon as June 1st— investors, executives and economists around the world are imagining what might happen immediately before, during and after, laying out contingency plans and puzzling over largely untested rules and procedures.

“We're in uncharted waters,” said Andy Sparks, head of portfolio management research at MSCI, which creates indices that track a wide range of financial assets, including the Treasury bond market.

On the brink of default, a “terror scenario” emerges.

Some corners of financial marketshave already started to shake, but these ripples pale in comparison to the tidal wave that forms as the pattern approaches. The US Treasury's $24 trillion market is the main source of funding for the government, as well as the largest debt market in the world.

The Treasury market is the backbone of the financial system, essential for everything from mortgage rates to the dollar, the most widely used currency in the world. Treasury debt is sometimes even treated as the equivalent of cash because of the government's creditworthiness guarantee.

Destroying trust in such a deeply rooted market would have effects that are difficult to quantify. Most agree, however, that a default would be "catastrophic," said Calvin Norris, portfolio manager and interest rate strategist at Aegon Asset Management. “That would be a horror scenario.”


A missed payment triggers a trading frenzy as markets begin to unravel.

The government pays its debts through banks that are members of a federal payment system called Fedwire. These payments then flow through the market pipeline, ending up in the accounts of debt holders, including individual savers, pension funds, insurance companies and central banks.

(Video) How a U.S. debt default could throw world markets into chaos

If the Treasury Department wants to change the date it repays investors, it needs to notify Fedwire the day before the payment is due, so investors know that the government was about to default the night before.

There is more than $1 trillion in Treasury debt maturing between May 31 and the end of June that could be refinanced to avoid default, according to analysts at TD Securities. There is also $13.6 billion in interest payments due, spread across 11 dates; that means 11 different opportunities for the government to miss a payment over the next month.

Fedwire, the payment system, closes at 4:30 pm. If a due payment is not made by that time at the latest, the markets will begin to unravel.

Stocks, corporate debt and the value of the dollar would likely plummet. Volatility can be extreme, not just in the United States, but around the world. In 2011, when lawmakers struck a last-minute deal to avoid breaching the debt limit, the S&P 500 fell 17% in just over two weeks. The reaction after a default can be more severe.

Perhaps counterintuitively, some Treasuries would be in high demand. Investors would likely get rid of any debt maturing soon – for example, some money market funds have already shifted their holdings from Treasuries maturing in June – and would buy other Treasuries with future maturities, still seeing them as a safe haven. in a period of stress.


A cascade of ratings downgrades creates “madness” for bondholders.

Joydeep Mukherji, lead credit rating analyst for the United States at S&P Global Ratings, said an unpaid payment would result in the government being considered in "selective default", whereby it has chosen to renege on some payments, but is expected to keep paying other debts. Fitch Ratingsalso saidwould lower the government's rating in a similar way. Such ratings are usually assigned to distressed companies and government borrowers.

Moody's, the other major ratings agency, said that if the Treasury defaults on one of the interest payments, its credit rating will be downgraded one notch to just below its current maximum rating. A second missed interest payment would result in another downgrade.

A range of government-linked issuers would also likely suffer downgrades, Moody's noted, from agencies that underpin the mortgage market to hospitals, government contractors, railroads, power utilities and defense companies dependent on government funds. It would also include foreign governments with guarantees on their own US debt, such as Israel.

Some fund managers are particularly sensitive to ratings downgrades and may be forced to sell their Treasury holdings to comply with rules on the minimum debt ratings they can maintain, depressing their prices.

“I would fear that in addition to the first-order craziness, there would also be second-order craziness: like, if you make two of the top three rating agencies downgrade something, then you have a bunch of financial institutions that can't hold those bonds. ,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago, at an event in Florida on Tuesday night.


(Video) Hear how US debt default could impact your household

The financial system's plumbing freezes, making trading more expensive and difficult.

Importantly, the default of one government bill, note or bond does not trigger the default of all government debt, known as “cross default,” according to the Securities Industry and Financial Markets Association, an industry group. This means that most of the government's debt would remain current.

That should limit the effect on markets that rely on Treasury debt as collateral, such as trillions of dollars in derivative contracts and short-term loans called repurchase agreements.

Still, any collateral affected by a default would need to be replaced. CME Group, a large derivatives clearing house, said that while it had no plans to do so, it could ban the use of short-term Treasuries as collateral or apply discounts to the value of some assets used to secure transactions.

There is a risk that the financial system's tubes will simply freeze as investors rush to reposition their portfolios while the big banks that facilitate trading pull away from the market, making it difficult to buy and sell virtually any asset.

Amidst this turmoil in the days after default, some investors may have a big windfall. After a three-day grace period, about $12 billion in credit default swaps, a type of protection against default on a bond, can be triggered. The decision on payments is made by aindustry committeethis includes large banks and fund managers.


The nation's global financial reputation is permanently diminished.

As panic subsides, confidence in the nation's pivotal role in the global economy may be permanently altered.

Foreign investors and governments hold $7.6 trillion, or 31%, of all Treasury debt, making them vital to the favorable financing conditions the US government has long enjoyed.

But after a default, the perceived risk of holding Treasury debt could increase, making it more expensive for the government to borrow for the foreseeable future. The dollar's pivotal role in world trade could also be undermined.

(Video) What Would Happen If the U.S. Defaults for the First Time in History?

Higher government borrowing costs would also make it more expensive for companies to issue bonds and borrow money, as well as raise interest rates for consumers who take out mortgages or use credit cards.

Economically, accordingwhite house predictionseven a brief default would result in half a million lost jobs and a somewhat shallow recession. A prolonged default would push those numbers to a devastating eight million job losses and a severe recession, with the economy shrinking by more than 6%.

These potential costs — unknown in the aggregate but widely considered enormous — are what many believe will motivate lawmakers to reach an agreement on the debt limit. “Every leader in the room understands the consequences if we fail to pay our bills,” President Biden said in a speech on Wednesday, as negotiations between Democrats and Republicansintensified. “The nation has never defaulted on its debt and never will,” she added.

Joe Rennison covers financial markets and trading, a beat that ranges from chronicling the vagaries of the stock market to explaining the often inscrutable trading decisions of Wall Street insiders. @JArennison

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(Video) What happens if the U.S. defaults on its debt?


What would happen if the US defaults on its debt? ›

U.S. debt, long viewed as ultra-safe

Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.

What would happen if the US stopped paying its debt? ›

If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession. The economic effects of such an unprecedented event would surely be negative.

How long will it take to pay off the US national debt? ›

To pay back one million dollars, at a rate of one dollar per second, would take you 11.5 days. To pay back one billion dollars, at a rate of one dollar per second, would take you 32 years. To pay back one trillion dollars, at a rate of one dollar per second, would take you 31,688 years.

Who does the US owe money to? ›

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.

Can you live in America without debt? ›

It might appear impossible, but many consumers succeed in living their entire lives without any debt. People of a variety of ages and income levels have made this choice. It's not an easy feat, but if it's something you truly want, don't let naysayers talk you out of it.

Will the U.S. ever have to pay off its debt? ›

In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.

How much does the U.S. owe its citizens? ›

Over the past 100 years, the U.S. federal debt has increased from $408 B in 1922 to $30.93 T in 2022. Comparing a country's debt to its gross domestic product (GDP) reveals the country's ability to pay down its debt.

Which country has highest debt? ›

Japan's debt-to-GDP ratio is the highest in the world due to a prolonged period of economic stagnation and demographic challenges.

How much does the US owe China? ›

Top Foreign Holders of U.S. Debt
RankCountryU.S. Treasury Holdings
1🇯🇵 Japan$1,076B
2🇨🇳 China$867B
3🇬🇧 United Kingdom$655B
4🇧🇪 Belgium$354B
6 more rows
Mar 24, 2023

What happens if US hits debt ceiling? ›

Even short of default, hitting the debt ceiling would hamstring the government's ability to finance its operations, including providing for the national defense or funding entitlements such as Medicare or Social Security.

What country has no debt? ›

The 20 countries with the lowest national debt in 2022 in relation to gross domestic product (GDP)
CharacteristicNational debt in relation to GDP
Macao SAR0%
Brunei Darussalam2.06%
Hong Kong SAR4.26%
9 more rows
May 11, 2023

Who owns the most U.S. debt? ›

The largest holder of U.S. debt is the U.S government.

Does China have more debt than the US? ›

The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.

What percentage of Americans are 100% debt free? ›

Fewer than one quarter of American households live debt-free. Learning ways to tackle debt can help you get a handle on your finances.

What age is debt free? ›

The Standard Route. The Standard Route is what credit companies and lenders recommend. If this is the graduate's choice, he or she will be debt free around the age of 58.

How many Americans are completely debt free? ›

That means most American adults either carry a mortgage, owe on a car, face monthly student loan payments, roll over charges on their credit cards—or all of the above. And yet, over half of Americans surveyed (53%) say that debt reduction is a top priority—while nearly a quarter (23%) say they have no debt.

Does anyone owe the US money? ›

However, this has declined over time, and as of 2022 they controlled approximately 25% of foreign-owned debt. As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).

How much is the United States worth? ›

For the fourth quarter of 2019, total wealth in the U.S. was $111.04 trillion.

How can we fix U.S. debt? ›

Solutions Towards Fiscal Responsibility
  1. Avert a debt ceiling crisis and build consensus with a bipartisan commission on fiscal reform/debt reduction. ...
  2. Make fiscal restraint a priority. ...
  3. Reform Medicare/health care policy. ...
  4. Save Social Security. ...
  5. Remove budget gimmicks and pay for new initiatives. ...
  6. Reform tax policy.
Feb 15, 2023

Why is America in so much debt? ›

America's debt has risen massively since the beginning of the 21st century, as "politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers, and emergency measures to help the nation endure two debilitating recessions," writes Jim ...

Why does China buy U.S. debt? ›

Key Takeaways. China invests heavily in U.S. Treasury bonds to keep its export prices lower. China focuses on export-led growth to help generate jobs. To keep its export prices low, China must keep its currency—the renminbi (RMB)—low compared to the U.S. dollar.

How much does Britain owe the US? ›

3. The United Kingdom. British investors increased their holdings of U.S. debt to $645.8 billion as of November 2022. This increased from $641.3 billion the month before.

What would happen if the US printed enough money to cover all the debts? ›

Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse. This would be, as the saying goes, "too much money chasing too few goods."

What will the US national debt be in 2030? ›

The public debt of the United States has increased significantly over the past 30 years, as it was around 3.2 trillion U.S. dollars in 1990 and surpassed 30 trillion dollars for the first time in 2022.
YearNational debt in billion U.S. dollars
8 more rows
Feb 24, 2023

Does debt go away after 7 years in USA? ›

A debt doesn't generally expire or disappear until its paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt.

How long does it take to pay off $1 trillion dollars? ›

One Trillion Dollars $1,000,000,000,000 - If you spent one dollar per second, in a day you would spend $86,400. Over the course of a year, your spending would come to more than $31.5 million. At that rate of spending, it would take you over 32,000 years to spend one trillion dollars. (A trillion = 1000 billion.)


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