Defaulting on the U.S. debt is way worse than you think

Defaulting on the U.S. debt is way worse than you think

If you’ve ever fallen behind on payments, you know that can dent your credit score and lead to all kinds of trouble. Many lenders might refuse to work with you, while others could charge higher rates for credit cards, mortgages, car notes, and other loans.

Well, governments can run into the same sort of trouble if they don’t pay their bills.

Currently, the U.S. government enjoys a nearly perfect credit rating. Investors see Treasury bonds, bills, and notes as virtually risk-free and are willing to accept comparatively low interest rates for them – because America has always paid its debts in-full and on-time.

But that could change as soon as this summer.

If Congress doesn’t raise the debt ceiling and America defaults on its debts for the first time, individuals, investment funds, and foreign governments could decide lending to the U.S. just isn’t worth the risk. Others will demand higher interest rates, raising the government’s borrowing costs and worsening the national debt spiral America is stuck in.

This isn’t hypothetical. In the 2011 debt ceiling crisis, S&P downgraded America’s credit rating after the federal government avoided defaulting on its debt by a matter of hours. The close-call was enough for investors to demand higher interest rates, which added $1.3 billion in borrowing costs that year and untold billions down the line.

Since other types of loans peg their interest rates to the rates charged for Treasurys, borrowing costs for businesses and mortgage interest rates also spiked. The stock market saw the worst sell-off since the Great Recession, and it took the economy months to recover.

And that was all from nearly missing the deadline – an actual default in 2023 would have much more dire consequences. Moody’s Analytics predicts the fallout would be on par with the Great Recession: six million jobs lost, and a four percent reduction in GDP.

Another potential cost: the end of the dollar’s status as a global reserve currency, a status the former finance minister of France called the United States’ “exorbitant privilege.”

Because America’s economy is so strong, many foreign governments and financial institutions conduct international business using the U.S. dollar. For them, this helps save time and money by not having to convert currencies. For Americans, the benefits are huge: We enjoy lower costs on imported products, the Treasury can charge lower interest rates, and America’s economic sanctions are much more effective – keeping the U.S. powerful on the global stage.

Despite the risks, it’s been over two-and-a-half months since President Joe Biden and Speaker Kevin McCarthy last met about the debt ceiling. This is unacceptable; a divided Congress means there will either be a bipartisan deal, or the ceiling won’t get raised at all. The American people will not stand for the self-imposed disaster of choosing to default on the debt.

Washington must make a responsible deal, one that guarantees the U.S. will never default on its debts while also making a dent in the spending problem that’s causing the government to run up against the debt limit. The moment demands nothing less.