What happens if US defaults on debt?

By: Sr vini

As of October 2021, the US government was sitting on a national debt of $28 trillion. This has increased over the years due to the US government spending more money than it makes. But the government raised the debt limit in October 2021 to cope with high debts. However, what will happen if the government does not raise or suspend the debt ceiling? Furthermore, what happens if US defaults on debt? 

If the US defaults on debt, it will hit on the country’s backbone. It will not be able to borrow any funds, the pension funds and banks holding US debt will fail, the dollar value will take a hit, and people who rely on government support will suffer. The worst and most catastrophic will be the US sinking into recession, and it will take years to revolver from it.

 Apart from these effects, many things can happen. So let’s get to know more about the effects if the US defaults on debt. 

What will happen if the government defaults?

The default of the US government on the debt will not only affect the US but the whole world too. As the US is the biggest economy in the world, if the US defaults on debt, then the stock markets and financial institutions of other countries will also take a hit. 

Speaking just for the US economy, there will be many effects which include:

  • Investors, such as pension funds and banks that hold U.S. debt, may fail.
  • People, as well as numerous businesses that rely on public funding, could be negatively affected.
  •  It is possible that the dollar’s value will fall, and the U.S. economy will likely enter a recession again.
  • The federal government’s basic functions would be jeopardized, such as maintaining national defense and national parks.
  • In the event of a global pandemic, this country’s public health system would not be able to respond adequately.
  • Investors’ confidence in the United States would be eroded, and the dollar would depreciate.
  • Also at risk is the dollar’s unique status as the world’s primary “unit of account,” i.e., its widespread use in international commerce and finance.
  • One or more of these outcomes could set off a recession and a credit market freeze that would impair American businesses’ ability to function.
  • A large number of people would be unable to make ends meet if the federal government were to default on its obligations and stop making payments.
  • All of this combined would make it much more difficult for the United States to afford all of the things it imports from abroad, and this would lead to a decrease in the standard of living for Americans.

All of these catastrophic events can happen if the government does not pay back the debt or does not raise or suspend the debt limit. 

Has the U.S. ever defaulted on its debt?

Actually, Yes! The US has defaulted on its debt many times. Here is the list of all defaults by the US:

  1. 1862 Default: Default on US demand notes in early 1862 due to Treasury’s financial struggles to pay for the Civil War. So the US government printed pure paper money, or “greenbacks,” which during the war fell in value relative to gold, depending on the Union armies’ military fortunes.
  2. 1933 Default: In 1933, the U.S. government publicly defaulted on its gold bonds. The United States had promised the bondholders that these bonds would be redeemed in gold coins in crystal-clear terms. Afterward, it refused to do so and instead offered depreciated paper money.
  3. 1968 Default: Then, in 1968, the United States government defaulted on its explicit promise to redeem silver certificate paper dollars for silver dollars.
  4. U S default on debt 1971: The fourth default occurred in 1971 when the United States government failed to honor its commitment under the Bretton Woods Agreement to exchange dollars held by foreign governments for gold.

What happens if US defaults on debt to China?

If the US defaulted, China would be forced to accept a lower amount on its loans to the US — i.e., the US Treasuries it owns. However, even if the US repudiated—that is, renounced its debts, as China did following Mao’s takeover—China would own nothing but a large number of worthless US IOUs, just as Chinese debt holders did following 1949.

What happens to gold if US defaults on debt?

The economic data coming out of the United States is one of the primary factors driving the gold price. As a result, the precious metal is almost certain to be impacted if a default occurs. When debt levels increase, investors become concerned about the debt’s sustainability. If they lose faith in the US economy, they will sell the dollar and buy gold, resulting in an increase in gold prices.

So it is most likely that if the US defaults on its debt, then the price of gold will rise, and the dependency on gold will increase. The countries will also show faith in gold in those times. 

Read Also: what is the average American credit card debt per household

What happens to crypto if US defaults on debt?

They would soar in value. The dollar and treasuries of the United States are popular investment options for many countries. If the US were to default, the dollar would collapse, and large foreign institutions would seek to store value in crypto and gold.

People assume that if one country is unable to service its fiat-denominated debt, then other countries will default on their fiat-denominated debt as well. So they will invest in crypto and gold. With this, the prices of crypto and gold will rise with an increase in their demand. 

What happens to stock market if US defaults on debt?

According to Moody’s, stock prices would likely fall by one-third, resulting in a $15 trillion loss in household wealth. At least until the debt ceiling issue is resolved and Treasury payments resume, mortgage rates, Treasury yields, and other consumer and corporate borrowing rates will spike.

Even then, rates never return to their previous levels. Because US Treasury securities would no longer be risk-free, future generations of Americans would face severe economic consequences.

This would be a double whammy for small business owners, as their retirement savings would dwindle, and they would lose business from consumers dealing with their lost nest egg. In addition, small businesses may find it more difficult to get into the supply chain of larger public companies because of this loss of value.

Where to invest if US defaults?

In case US defaults, then you will still have many options to invest in, which will be safer than investing in US, at that time. Here are all the possible options for you to invest your money: 

  • Gold
  • Silver
  • International Bond Funds
  • Singapore Funds
  • Swiss Francs
  • Treasury Bills
  • Triple-A Corporate Bonds

Bottom Line

So this was all about the results of what happens if US defaults on debt. Surely, the impact of the US default will be on the whole world, but that is unlikely to happen. The US is the biggest economy in the world, and it will surely have its way back even after high amounts of debt. 

We hope this article was helpful & informative. Please leave your valuable thoughts & suggestions in the comments below!

Thank you for reading!