How You Would Be Affected if the U.S. Defaults on Its Debt
Lynchburg, VA- If Congress does not come to an agreement before we hit the debt ceiling, it could send a financial ripple effect across America. We wanted to know how it could affect you.
From business to benefits, we're told Americans will feel the effects of a debt default for years to come. It's the trickledown effect that could cause a wave of worry. No matter who you are, if the government defaults on its debt, you'll feel it.
But first, what does it really mean if the government defaults?
"Treasury will no longer be able to make payments either on its bonds or people who are supposed to get checks from the treasury," said Gerald Prante, an assistant professor of economics at Lynchburg College.
And who owns these bonds that the U.S. Treasury is borrowing from? Well, they could be owned by institutions, foreign investors like China, or even you.
"If you ever buy a savings bond as a kid, you are a lender to the government," said Prante.
If the U.S. Treasury is not able to make a payment on these loans, America's credit score basically goes down the drain. And as it goes down, interest rates on everything from home loans to credit cards, go up.
"Realtors would be hurt because home buying would become more expensive and the housing market would take another tumble because interest rates would spike," said Prante.
Business owners who have taken out loans could be in trouble too, especially if their loan is from the fed.
"One is they may not get their payment from government. Second is if they tried to borrow from government they may have higher interest rates on borrowing."
Businesses may even have to lay off workers until folks in Washington can right the ship. But that's not even the end of it. If the Treasury Department isn't allowed to borrow more money, they could miss their payments to states, too.
"If the federal government doesn't make payments to the states, then the states have to run short-term budget shortfalls, and they'd have to borrow more, or they'd have to raise your taxes," said Prante.
Prante says November 1st is the biggest deadline we have to watch. That's when the Treasury is supposed to make payments on things like Social Security, veteran's benefits, and Medicare. If a deal is not reached by then, a lot of people could lose a crucial part of their income.
Now this whole debt debate may seem familiar to you. That's because we just had this same race to raise the debt ceiling in 2011. So, why is this happening again? Because nothing was actually fixed back in 2011.
A short-term deal was reached by Republicans and Democrats that created a panel, which was supposed to come up with solutions to our debt problems. But, nothing was proposed. If you remember, that's when sequestration took effect.
So, we will keep flirting with this financial crisis until Congress and the President make some real reforms.