What Happens if the U.S. Defaults on its Debt? (for the first time ever)

You’re likely already aware of the US’s national debt of unfathomable proportions (somewhere in the realm of 28 trillion and climbing fast; see usdebtclock.org). But most Americans aren’t really concerned about what goes on behind the scenes. Yes, it’s one of the government’s least glamorous topics, but now it might have consequences for everybody (America AND abroad).

For the first time ever, the US government might default on its debt. In fact, this could happen as soon as October 15th of this year. The US has always relied on its credit for domestic policy-making and international standing. Paid back through Treasury bonds, the country has never defaulted on our debt. Hence, the US “credit score” has been perfect with international firms that assess creditworthiness.

To prevent default, Congress has consistently agreed to raise the debt ceiling, which is the upper limit on the amount which the government is permitted to borrow. Instead of cutting deficits through lowered spending or raised taxes, Congress has routinely, and without much spectacle, raised the debt ceiling. This time, Congress may not be able to raise the debt ceiling in time – so, what would happen if the government defaults on its debt?

Treasury Security Janet Yellen says that a default would permanently weaken America. She notes that our creditworthiness has allowed us to borrow more cheaply than any other nation, but that a default would end that longstanding precedent. This higher cost of borrowing, she says, would largely fall on the consumer. If you use a credit card, take out car loans, or pay a mortgage, you may feel the effect. Even more: a mild recession would be an absolute best-case scenario; unemployment could rise to about ten percent, with stock prices plummeting nearly one-third.

In the past, Congress has always evaded default through a raising of the debt-ceiling. With guidance from the Department of Treasury, it is unlikely that the government will fail to prevent a worst-case scenario.

This blog post is part of the CIMA Law Group Blog. If you are in need of legal help, the CIMA Law Group is a law firm in Phoenix, Arizona which possesses expertise in Immigration Law, Criminal Defense, Personal Injury, and Government Relations.