What Would Happen If The U.S. Defaulted On Its Debt?

What Would Happen If The U.S. Defaulted On Its Debt?

Funding wise, the United States government is running on fumes. America actually reached its debt limit back in , but this was due more to an accounting glitch than anything else. Bipartisan politics has grounded efforts to raise the U.S. debt levels to a halt and now the country is nearly out of cash. The point of no consequence has been reached and the American government has been forced to shut down. Yet what looms far worse is the point of no return, when the United States would default on its debts at the end of the month.

What Would Happen If The U.S. Defaulted On Its Debt?

Consequence for debt default

What would happen if the United States actually defaulted on its loans? No one knows for certain, but the results would almost certainly be catastrophic. While many analysts expected the United States to go into shut down, very few believe that the nation will actually go into default. If America did so, assumptions would be thrown out the window.

Exclusive: Third Point is diving into the private and SPAC markets [In-Depth]

Nestle Dan Loeb Daniel Loeb third point capital hedge fund manager activist investor poison pen activism Yahoo corporate governance famous investorsDan Loeb's Third Point returned 11% in its flagship Offshore Fund and 13.2% in its Ultra Fund for the first quarter. For April, the Offshore Fund was up 1.7%, while the Ultra Fund gained 2.3%. The S&P 500 was up 6.2% for the first quarter, while the MSCI World Index gained 5%. Q1 2021 hedge Read More

Entering into uncharted and unprecedented territory would shake investor confidence around the world. With the global economy already on unstable ground, an American default would reverberate across the globe. Stock markets would sink but for the first time in decades investors would have no safe place left to turn to. In the past, when stock and commodity markets headed south, investors would retreat to the U.S. dollar and buy bonds. If America defaulted, the value and perceived safety of bonds would plummet.

Importantly, U.S. bonds would probably never be looked at the same again. So far, investors have been willing to buy bonds and charge extremely low interest because the long running assumption is that the United States will never default on its debt. If America does default? Suddenly those supposedly iron-clad safe bonds look far less attractive. And that means that investors will start demanding more interest in order to assume the risk of loaning to the American government.

Rise in interest rates

Interest rates would rise dramatically, and not just in the short term, but most likely for the next several years, at a minimum. Indeed, the uptick in interest could be permanent as the long held belief that the American government would never default on its debt would be blown to the wind. This increase in interest rates would cost the United States billion upon billions of dollars in the long run.

Beyond that, the U.S. economy would most likely plummet. Stock markets would be sent spiraling downwards, business and consumer confidence would be shaken to the core, and financial systems around the world would be rocked. In a worst case scenario, the United States could even find itself slipping into recession, if not depression.

Value of the dollar

The value of the dollar would also be slammed. Up until now the dollar has been the world’s reserve currency, which means that it is always in demand. If the U.S. defaulted, demand for the dollar would almost certainly plummet. This would cause the value of the dollar to drop, which would have far reaching consequences for the American economy. Importantly, this would add fuel to those countries and leaders who have been arguing that the global economy should shift away from using the dollar as the primary reserve currency.

All of these points are conjecture, and yet conjecture itself outlines perhaps the most important aspect of a potential default. No one really knows what would happen, as a full-scale U.S. default has never occurred. What this would mean for the larger global economy is difficult to ascertain, however, it would likely signal a major turning point in history.

NOTE: This is an op-ed and reflects only the views of the Autor

No posts to display