What would happen if the US defaulted on it’s debt?

What is the US debt and what is the debt ceilling?

The US governmental debt is the total amount of money that the US government owes to its creditors. As of March 8, 2023, the US governmental debt was $31.46 trillion. This is the highest level of debt in US history. you can check it live on https://www.usdebtclock.org

The US government borrows money by selling Treasury securities, which are bonds that pay interest over a set period of time. The government uses the money it borrows to pay for its expenses, which include Social Security, Medicare, and the military.

The United States government has a debt ceiling. This is the maximum amount of money that the government is allowed to borrow. Congress has to raise the debt ceiling every time the government reaches its limit. This is because the government cannot borrow more money without Congress's permission. In recent years, there have been a number of debt ceiling crises, where Congress has not been able to agree to raise the debt ceiling. This has led to a lot of uncertainty and anxiety about the future of the US economy.

A debt ceiling crisis is a very serious thing. If Congress does not raise the debt ceiling, the government will not be able to pay its bills. This could lead to a default on the government's debt, which would have a devastating impact on the US economy and the global economy.

What would happen if the US defaulted?

Financial Market Turmoil:

A U.S. default would trigger a severe shock to global financial markets. Investors would lose confidence in U.S. Treasury securities, which are considered one of the safest assets. This could lead to a sharp spike in interest rates, a sell-off in other assets like stocks and bonds and potentially a decline in the value of the U.S. dollar. But keep in mind a default on U.S. debt could potentially create a shortage of U.S. dollars in the global financial system, leading to a temporary increase in the value of the dollar. This is because investors and market participants may rush to acquire dollars in order to cover their obligations or reduce their exposure to other currencies that could be affected by the default. In times of uncertainty and financial stress, the U.S. dollar has historically been viewed as a safe-haven currency due to its status as the world's reserve currency and the depth and liquidity of U.S. financial markets. Also because a default signal a halt of goverment spending and  issuing of new currency by the FED. The increased demand for dollars could result in a short-term appreciation of the currency.

Increased Borrowing Costs:

Defaulting on its debt would make it much more expensive for the U.S. government to borrow money in the future. Investors would demand higher interest rates to compensate for the increased risk, leading to higher borrowing costs for the government. This, in turn, could hinder economic growth, increase the budget deficit, and limit the government's ability to fund essential programs and services. Since interest rates are inversely related to bond prices, a sell off of U.S. treasuries bonds will send interest rates above the two digits.

Domestic and Global Economic Recession:

The financial market turmoil and higher borrowing costs resulting from a default would likely push the U.S. economy into a recession. Businesses would face difficulties accessing credit, consumer confidence would decline, and unemployment could rise. The ripple effects would be felt globally, as the United States is a major driver of the world economy, also U.S. treasuries are owned by countries and pension funds all over the world, potentially creating collaretal damage to the exposed economies.

Loss of Global Confidence:

Probably the most important long term aspect of an  U.S. default would probably be the damage to the country reputation as a reliable borrower and undermine global confidence in the U.S. economy. This could have long-term consequences, such as reduced demand for U.S. Treasury securities and a shift away from the U.S. dollar as the primary global reserve currency.

Legal and Political Consequences:

Defaulting on its debt obligations could lead to legal challenges and lawsuits from bondholders seeking repayment. The political fallout would be significant, with potential damage to the government's credibility and public trust. It could also lead to contentious debates and political gridlock surrounding future fiscal policies and government spending.

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