7 doomsday scenarios if the U.S. crashes through the debt ceiling (2023)

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Federal workers furloughed. Social Security checks for seniors on hold. Soaring mortgage rates. A global financial system sent reeling.

Leaders from Congress and the White House are trying to forge an agreement to lift the federal debt ceiling, with only a few weeks before the Treasury Department may no longer be able to avert an unprecedented U.S. default. If they fail, and the government can’t meet its payment obligations, economists and financial experts predict chaos.

“It would be a lethal combination,” said Mark Zandi, chief economist at Moody’s. “You can see how this thing could really metastasize and take down the entire financial system, which would ultimately take out the economy.”

Think you can tame the national debt? Play our budget game.

Treasury Secretary Janet L. Yellen has said the agency may only be able to sustain operations until June 1 before running out of money if the government can’t borrow more. That specific deadline — known as the “X-date” — depends on tax revenue and spending, which can fluctuate dramatically from week to week.

What happens next is also hard to predict.

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(Video) 7 doomsday scenarios if the U.S. crashes through the debt ceiling. #update #usa #news #newsbulletin

The cascading impacts of default would probably compound — a pause in federal payments would hurt the economy, which would hurt the stock market, which would in turn hurt the economy even more, and so on. The interactions between collapsing home values, rising interest rates and a destabilized global financial system are hard to calculate. Some estimates suggest that more than 8 million jobs could be wiped out. Mortgage rates might soar by more than 20 percent, according to some projections, and the economy would contract by as much as it did during the 2008 Great Recession.

See how hitting the debt ceiling could unleash chaos

But what economists stress above all else is the unpredictability — particularly if the breach lasts for weeks or months. Experts stress that the worst-case scenarios are unlikely if lawmakers only narrowly miss the deadline, perhaps by hours or even a few days, but that the risks rise dramatically should the standoff persist.

“We do not know: This has never happened,” said Claudia Sahm, a liberal economist who worked at the Federal Reserve. “What makes me so concerned is I can’t sketch out, and I don’t think anyone can, is: What happens at X+1?”

Here are some outcomes that experts worry about most.

Stocks crash

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Wall Street would probably be the first trouble spot.

So far, financial markets haven’t swung much over the debt ceiling standoff. The price to hedge against a U.S. government default has risen, as has the cost of government bonds due around the debt ceiling deadline — reflecting doubt about repayment. But those tremors are not noticeable for most households.

That is expected to change the closer the government gets to a default. The shock of a missed payment would ripple across the financial system — stocks, bonds, mutual funds, derivatives — before spilling out into the broader economy, experts say.

Stocks would likely plummet on the expectation of a wider economic downturn, as interest rates rise and investors pull funds out of the market to preserve their access to short-term cash. A banking sector already wary of making new loans could tighten up further.

How the Washington establishment is confounding Biden’s debt ceiling plan

The last time the U.S. government neared default, stocks took a bruising. In 2011, the X-date was less than a week away during a standoff between President Barack Obama and Republicans in Congress. Major indexes fell by roughly 20 percent.

Moody’s Analytics has estimated that stock prices could fall by roughly one-fifth, wiping out $10 trillion in household wealth and devastating the retirement accounts of millions of Americans. The White House has estimated that the decline could be closer to 45 percent.

The $46 trillion bond market would also tremble, as the values of existing Treasury bonds collapse due to higher yields on new ones. And businesses would likely halt expansion — driving stocks down even more.

(Video) Debt ceiling debate | Will we hit 'doomsday' scenario?

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A sudden recession

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If the standoff persists, the impact would quickly spread from financial markets to the broader economy.

A drop in household wealth across the country, caused by a sell-off on Wall Street, would reduce consumer spending, which would hurt businesses, too.

When is the debt limit deadline? Early June, CBO says. Unless it’s not.

And a spike in interest rates would make it harder to get a loan or start a small business. That could also crash the already cooling housing market. A recent report from Zillow projected that a default would drive mortgage rates above 8 percent and push housing sales down by a startling 23 percent. The construction industry and other sectors would feel the pain, too.

The most drastic impact might be a pause in regular federal payments to tens of millions of American families, including seniors on Medicare and Social Security and people relying on food stamps. The federal government is projected to spend roughly $6 trillion this year, which translates into roughly $16 billion per day. Not all of that goes directly to households, of course, but it’s a huge amount of money to vanish from the economy overnight.

Debt ceiling breach could wipe out 8 million jobs, White House warns

A 2013 report by the Treasury Department found the 2011 debt ceiling standoff caused a $2.4 trillion decline in total household wealth. The broader economy, the White House Council of Economic Advisers said, could contract by as much as 6 percent, similar to the 2008 Great Recession.

Federal workers in limbo

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The U.S. government has a process for shutting down when Congress fails to approve a new budget: Agencies whose spending hasn’t been approved prepare workers for furloughs, instructing certain “essential” staff that they will keep working without pay. There have been three shutdowns that lasted at least a full day over the past decade. Workers are all typically repaid afterward.

But hitting the debt ceiling might look nothing like that, experts say. The White House Office of Management and Budget has not yet disseminated instructions for a debt-related shutdown, which some budget analysts say would be difficult because there is no way of knowing which payments the government won’t be able to make. That could change as the deadline nears, but as of now, there is no playbook for keeping even essential federal employees on the job.

(Video) U.S. debt ceiling: What happened to stocks last time there was potential default drama #shorts

Invoking the 14th Amendment to dodge the debt limit is risky, Biden aides fear

The uncertainty could affect U.S. military personnel as well as food safety inspectors, air traffic controllers and workers in other vital jobs. The federal government is the largest employer in the country, with roughly 4.2 million full-time employees, according to the Congressional Research Service. The National Association of Government Employees, which represents nearly 75,000 federal workers, sued to challenge the constitutionality of the debt limit earlier this month, citing its potential impact on federal workers.

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Social Security and Medicare miss payments

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More than 60 million people receive monthly Social Security payments, mostly seniors. A similar number depend on Medicare for their health insurance.

Some Republicans have claimed that the federal government can continue making these payments even without borrowing by redirecting incoming tax revenue. But budget experts are skeptical the Treasury Department will have the ability to send seniors these benefits on time, particularly if the breach lasts for weeks or months.

If the government can still make some payments with incoming tax revenue, the administration might have to pick between sending checks to seniors and making interest payments on the debt. But forgoing those interest payments to keep Social Security and Medicare functioning could exacerbate what would likely be an already severe financial crisis in that doomsday scenario.

U.S. borrowing costs soar

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The federal government is able to borrow money relatively cheaply because it’s seen as a very safe credit risk — no one, in normal circumstances, expects that it might miss any payments.

The safety of U.S. government bonds has made them an essential building block in the world financial system. Serving as reserves for everything from foreign nations’ central banks to money market funds, U.S. Treasurys are widely recognized as one of the most secure and liquid investments available, backed by the full faith and credit of the U.S. government. Any financial instrument whose value is based on Treasury bonds could be thrown out of whack after a debt ceiling breach, with a sharp drop in prices leading to volatility and uncertainty worldwide.

Economists say the discount the United States has enjoyed for decades on borrowing could end. One estimate by the Brookings Institution, a D.C.-based think tank, found that breaching the debt limit could increase federal borrowing costs by $750 billion over the next decade.

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(Video) U.S. Debt Ceiling Crisis: What Happens If The U.S. Defaults?

Economic problems spread worldwide

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Many nations safeguard their finances by buying large amounts of U.S. government debt, widely regarded as one of the safest assets in the world. But breaching the debt ceiling could drive the value of those bonds down, hurting reserves for many nations.

Economists fear that would dramatically increase the ranks of the countries drowning in debt, like Sri Lanka and Pakistan, with a potential rise in protests and global geopolitical instability. The Federal Reserve’s push to raise interest rates over the past year to curb inflation has already eroded the value of U.S. bond holdings for many nations. And according to the Council on Foreign Relations, more than half of the world’s foreign currency reserves are held in U.S. dollars — roughly three times as much as any other currency.

The dollar drops, along with U.S. prestige

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A default could hurt U.S. standing on the world stage, experts say, by revealing the depth of the country’s internal political dysfunction.

Already, financial experts have been following some early signs that the world economy is beginning to shed its dependence on the dollar, with countries such as Brazil and Malaysia calling for nations to trade more frequently in other currencies. Roughly 60 percent of foreign currency exchanges still happen in dollars, but a default on U.S. debt — which could send the value of the greenback reeling — could change that.

As Yellen, in Japan on Thursday, said to reporters about a default: “It would also risk undermining U.S. global economic leadership and raise questions about our ability to defend our national security interests.”

Something more fundamental may also be at stake. Governments’ credibility is tied in part to their ability to respond to a crisis. A debt ceiling breach would cast doubt on the federal government’s capacity not only to respond to an emergency, but also to fulfill one of its most elementary functions — paying the bills. If the United States can’t do that, citizens and leaders in other countries might wonder, what else can’t it manage anymore?

“It would erode global confidence in our political system, because part of our standing in the world is based on international confidence that our political system is basically functional,” said Daniel Bergstresser, associate professor of finance at Brandeis University’s International Business School. “And this would show it isn’t.”

What to know about the U.S. debt ceiling

The latest: Today, President Biden will meet with House Speaker Kevin McCarthy to resume debt talks after negotiations were paused after a brief breakdown last week. If the debt ceiling isn’t raised by the deadline, here’s what a government default means and the payments at risk. Here are the negotiators hammering out a debt ceiling deal.

Understanding the debt ceiling fight: Biden and the House Republican leadership are on a collision course over the national debt limit. In this comic, see how hitting the debt ceiling could unleash chaos. Here’s when the debt ceiling battle could end.

(Video) Economic experts on what could happen if Congress fails to raise debt ceiling

What is at stake? Invoking the 14th Amendment to dodge the debt limit is risky, White House officials say. If the debt limit is breached, Biden warned that it could send the U.S. economy into a free fall. The debt ceiling breach could wipe out 8 million jobs, a recent analysis found. Amid consumer anxiety over the uncertainty, financial experts warn against making fear-based decisions.

FAQs

What happens if the US government defaults on debt? ›

A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.

What happens if America defaults? ›

Moody's Analytics, a research outfit, estimates that in the immediate aftermath of a default, America's economy would shrink by nearly 1% and its unemployment rate would rise from 3.4% to 5%, putting about 1.5m people out of work.

What happens if the US raises the debt ceiling? ›

Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the U.S. financial market and tip the economy into recession.

What is the deadline for debt ceiling? ›

Treasury Secretary Janet Yellen reaffirmed June 1 as the “hard deadline” for the US to raise the debt ceiling or risk defaulting on its obligations.

What is the safest place for money if the US defaults on debt? ›

Treasurys have been seen as some of the safest investments worldwide. They are held by companies and countries the world over and used as collateral in all kinds of financial transactions. If the federal government failed to pay bondholders, it would have unimaginable consequences for the standing of the U.S.

How do I prepare for debt default? ›

Here's how you can prepare for a potential debt default.
  1. Military families should keep extra cash.
  2. Expect volatility in bonds.
  3. Stick with high-quality investments.
  4. Make necessary adjustments to your 401(k)
  5. Don't over invest, despite temptation.
  6. Prepare for Social Security delays.
21 hours ago

Does the US ever have to pay off its debt? ›

Payment of US national debt

On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.

Who does the US owe money to? ›

Which countries hold the most US debt? Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.

What happens if you default on your mortgage in the USA? ›

Falling behind on payments or missing payments, though, can lead to what's called mortgage default. Once this happens, your house can go into foreclosure, and you may lose your home altogether.

How much debt is the US in 2023? ›

Maintaining the National Debt

As of April 2023 it costs $460 billion to maintain the debt, which is 13% of the total federal spending. The national debt has increased every year over the past ten years.

How many times has the US hit the debt ceiling? ›

The debt ceiling was raised 74 times from March 1962 to May 2011, including 18 times under Ronald Reagan, eight times under Bill Clinton, and seven times under George W. Bush. In practice, the debt ceiling has never been reduced, even though the public debt itself may have reduced.

Is the US the only country with a debt ceiling? ›

Several countries have debt limitation laws in place. Only Denmark and the United States have a debt ceiling that is set at an absolute amount rather than a percentage of GDP. The US Congress began using the measure in 1917 and modified the financing law in 1939 to give the treasury more flexibility in issuing debt.

When was the last time the debt ceiling was not raised? ›

When was the last time the U.S. was debt free? January 1835 was the first and only time all of the government's interest-bearing debt was paid off, according to the Treasury Department.

Who buys the most US debt? ›

The Federal Reserve, which purchases and sells Treasury securities as a means to influence federal interest rates and the nation's money supply, is the largest holder of such debt.

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.

Why can't the US make money to pay off debt? ›

The Fed tries to influence the supply of money in the economy to promote noninflationary growth. 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.

What are three steps you are going to take to get out of debt? ›

Here are 5 steps to get out of debt:
  • List everything you owe.
  • Decide how much you can pay each month.
  • Reduce your interest rates.
  • Use a debt repayment strategy.
  • Be diligent moving forward.
Dec 31, 2022

How can a debt be forgiven? ›

Debt forgiveness happens when a lender forgives either all or some of a borrower's outstanding balance on their loan or credit account. For a creditor to erase a portion of the debt or the entirety of debt owed, typically the borrower must qualify for a special program.

What happens if a borrower is in default? ›

When you default on a loan, your account is sent to a debt collection agency that tries to recover your outstanding payments. Defaulting on any payment will reduce your credit score, impair your ability to borrow money in the future, lead to fees, and possibly result in the seizure of your personal property.

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 countries have 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%
Kuwait2.92%
Hong Kong SAR4.26%
9 more rows
May 11, 2023

Does anyone owe the US money? ›

1 Foreign governments hold a large portion of the public debt, while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, pensions funds, insurance companies, and holders of savings bonds.

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.

Which country owes the most money to China? ›

At the end of 2021, of the 98 countries for whom data was available, Pakistan ($27.4 billion of external debt to China), Angola (22.0 billion), Ethiopia (7.4 billion), Kenya (7.4 billion) and Sri Lanka (7.2 billion) held the biggest debts to China.

How did America get in debt to China? ›

U.S. debt to China comes in the form of U.S. Treasuries, largely due to their safety and stability. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.

What percentage of Americans default on their mortgage? ›

Mortgage delinquency rate in the U.S. 2000-Q3 2022

Under the effects of the coronavirus crisis, the mortgage delinquency rate in the United States spiked to 8.22 percent in the second quarter of 2020, just one percent down from its peak of 9.3 percent during the subprime mortgage crisis of 2007-2010.

How many people are defaulting on mortgages? ›

While there were approximately 400,000 serious delinquencies remaining before the pandemic, today there are roughly 640,000, the data shows.

What happens if you can't pay mortgage USA? ›

Once you're 120 days behind on your payments, the lender can start the foreclosure process if you haven't submitted a complete mortgage assistance application. Loan modification programs help distressed borrowers avoid foreclosure by permanently changing the terms of a loan.

What year was the US not in debt? ›

As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.

How much is the United States worth? ›

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

How much debt is Russia in 2023? ›

Key information about Russia National Government Debt

Russia National Government Debt reached 310.4 USD bn in Feb 2023, compared with 327.9 USD bn in the previous month.

How does the debt ceiling affect Social Security benefits? ›

As debt ceiling negotiations continue, some officials are warning Social Security checks may be affected. Benefit checks may be delayed, which would cause financial hardship for individuals and families who rely on that money. Still, some policy experts say it is unlikely the standoff would come to that point.

Why is the US the most in 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 the US have the highest debt? ›

The U.S. debt is the total federal financial obligation owed to the public and intragovernmental departments. The U.S. national debt is so big because Congress continues both deficit spending and tax cuts.

What country has more debt than the US? ›

Japan tops the ranking with central government debt of 221 percent of GDP, followed by Greece, Sudan, Eritrea, and Singapore. Not long ago, the U.S. was among the least indebted countries.

Has the US never had debt? ›

The U.S. has had debt since its inception. Our records show that debts incurred during the American Revolutionary War amounted to $75,463,476.52 by January 1, 1791. Over the following 45 years, the debt grew. Notably, the public debt actually shrank to zero by January 1835, under President Andrew Jackson.

How much of the US population is 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.

How much is the US debt limit? ›

The $31.4 trillion debt ceiling has become a perennial subject of political impasses in recent years, as Republicans seek to limit government spending by slashing social welfare programmes, a prospect many Democrats balk at.

What happens if our country defaults? ›

What Happens When a Country Is In Default? If a country can't pay its debts, it is in default. This lowers its credit rating and decreases the cost of its debt. The country's entire economy can suffer, and it may see less investment in the future as global investors become wary of buying that country's debt.

What happens if there is a default? ›

Defaulting on any payment will reduce your credit score, impair your ability to borrow money in the future, lead to fees, and possibly result in the seizure of your personal property.

When happens when a country defaults? ›

The immediate impact of sovereign default to creditors is the loss of the principal amount loaned to the government and the interest owed on the debt. The state may resort to either partial cancellation or decide to restructure the debt to more favorable terms.

What happens if you don't pay your debt in America? ›

If you stop making your required payments on general consumer debts (like a line of credit, overdraft or credit card), your creditors will generally charge you a fee for defaulting on (missing) payments and start reporting those defaults on your credit history.

Which 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%
Kuwait2.92%
Hong Kong SAR4.26%
9 more rows
May 11, 2023

What happens to money markets if US defaults? ›

A default would rock global financial markets, spurring many investors to sell their stocks and bonds. Prices would plummet, although it's unknown how severe the hit would be given that the U.S. has never been in such a situation.

How do you survive in default? ›

4 Rules To Survive The Coming Worldwide Debt Default
  1. Rule #1: Get Active.
  2. Rule #2: Diversifying Active Managers.
  3. Rule #3: Sell Liquidity.
  4. Rule # 4: Get Radical on Taxes.
Jul 24, 2018

Will the stock market crash if the US defaults on its debt? ›

A US debt default could spark a 45% crash in the stock market and generate a deep recession akin to the 2008 Great Financial Crisis, the White House's Council of Economic Advisers warned earlier this month.

What happens to the bank when you default? ›

For secured personal loans: The default will usually result in the lender seizing the collateral asset. For secured business loans: The default will usually result in lenders capturing revenue or inventory. For unsecured personal loans: The default will often result in wage garnishment.

How long does it take to recover from a default? ›

A default will stay on your credit reports for up to seven years, and prospective lenders will be far more reluctant to extend credit to you. You should make an effort to repay the defaulted loan or credit card debt whenever possible.

What countries are most likely to default? ›

10 Countries That Are Most Likely to Default
  • Tunisia. ...
  • Ghana. ...
  • Egypt. ...
  • Kenya. ...
  • Ethiopia. ...
  • El Salvador. ...
  • Pakistan. ...
  • Belarus. The country is facing Western sanctions and economic turmoil due to its support of Russia in the Ukraine campaign.
Mar 17, 2023

How many countries are in danger of default? ›

“There are currently 54 countries on our list [of those likely to default] and if we have more shocks – interest rates go up further, borrowing becomes more expensive, energy prices, food prices – it becomes almost inevitable that we will see a number of these economies unable to pay,” he said.

Why can't the US just pay off its debt? ›

Because the United States runs budget deficits — meaning it spends more than it brings in through taxes and other revenue — it must borrow huge sums of money to pay its bills. That includes funding for social safety net programs, interest on the national debt and salaries for troops.

What is the 11 word phrase to stop debt collectors? ›

If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.

What causes the most debt in the United States? ›

Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt. Visit the Historical Debt Outstanding dataset to explore and download this data.

Videos

1. How a U.S. debt default could throw world markets into chaos
(CBS News)
2. What Happens If The US Defaults on its Debts | Debt Ceiling Crisis 2023 #shorts
(FIRE Psy Chat)
3. How will the U.S. avert a default on the country’s debt limit?
(TODAY)
4. EXPLAINED: DOOMSDAY Scenarios If US Defaults On Debt | Breaking Points
(Breaking Points)
5. Hear how US debt default could impact your household
(CNN)
6. US Debt Ceiling Crisis: An URGENT warning to investors. Is a Crash coming?
(TechLead)
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