Imagine if the United States couldn’t pay back the money it borrowed. It might seem crazy, but let’s explore what could happen if the U.S. defaulted on its debt. We’ll take a look at how it would affect regular people, the economy, and the global financial system.
- Impact on People Who Invest in Treasury Bonds:
When the U.S. borrows money, it does so by selling something called Treasury bonds. These bonds are like IOUs that promise to pay back the money with interest. If the U.S. can’t pay its debts, the value of these bonds would drop. This means people who invested in them would lose money. It would also become harder and more expensive for the U.S. government to borrow money in the future.
- Economic Problems for Everyone:
If the U.S. can’t pay its debts, it would cause big problems for the economy. Interest rates would go up, which means it would be more expensive for people and businesses to borrow money. This would lead to less spending and investment, and could even cause a recession, where the economy shrinks and people lose jobs.
The U.S. dollar, which is the currency we use, would also lose value. This means it would be worth less compared to other currencies. It might become harder for us to buy things from other countries, and prices of imported goods could go up.
- Global Impact:
A U.S. debt default wouldn’t just affect Americans—it would have consequences around the world. Many countries and investors hold U.S. Treasury bonds because they’re considered safe. But if the U.S. can’t pay back its debts, people would lose confidence in these bonds. They would start looking for other safer investments, like bonds from other countries. This would cause problems in the global financial system and make it harder for everyone to borrow money.
- Trouble for the U.S. Government:
If the U.S. can’t pay its debts, it would damage the government’s reputation. It would become harder and more expensive for the government to borrow money in the future. This could mean less money for important things like healthcare, infrastructure, and defense. The government might have to make big spending cuts or increase taxes, which would hurt the economy even more.
A U.S. debt default would have serious consequences for regular people, the economy, and the world. People who invested in Treasury bonds would lose money, and it would be harder for the government to borrow money in the future. The economy would suffer, with higher borrowing costs, less spending, and a weaker U.S. dollar. The global financial system would also be affected, causing problems for everyone. It’s important to avoid a debt default because the consequences would be bad for all of us.
With that being said, it is highly unlikely for the U.S. to default on their debt. Neither Republicans nor Democrats want it to happen because it would be horrible for everyone involved. U.S. Leaders and President Joe Biden understand that, which is why they are highly motivated to come to agreement.
The U.S. has never defaulted on it’s debt, and we don’t think it will now.
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Meet the Contributor
Zack Swad is a fee-only financial planner located in Santa Rosa, CA serving clients locally and across the country (virtually).
He specializes in financial planning and retirement planning for people age 50+. As a fee-only, fiduciary, and independent financial advisor, Zack Swad is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice. He has been in the finance industry for over 11 years. He previously worked for a Fortune 500 Financial Services company, managing a practice of $800 million for 300 clients. Zack then went on to build his own firm, Swad Wealth Management, LLC so he could make a deeper impact in his client’s lives. In his free time, Zack enjoys spending time with his wife Elise, playing board games, piano, and singing.
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