Perhaps you've heard that if Congress fails to
raise the debt ceiling by October 17 the United States will face an
unprecedented financial default. The way some Republicans talk about the consequences of passing that threshold,
you might think that hitting that limit might not be all that bad
(Florida's Ted Yoho, in fact, thinks it would be beneficial). But
sober-minded economists are describing the ramifications of a default
with terms usually reserved Roland Emmerich flicks—like "apocalypse." The full economic fallout of defaulting are unknown. "It's a little like asking how many people will be killed if there's another terrorist attack," says Isabel Sawhill, a budget expert at the Brookings Institution. But we do know that as early as October 22 the
US government will run out of money to pay its bills and federal
spending will have to be cut by about 32 percent, according to an
estimate by the Bipartisan Policy Center (BPC). That's when Americans of all stripes would start feeling the pain in many different ways. Here are 16 of them:
1. Social Security payments will be delayed, possibly cut. According to President Obama, in the event of a default the US government will have no choice but to
delay Social Security checks.
The government owes $12 billion in Social Security payments on October
23 and an additional $25 billion on November 1. At some point between
October 22 and November 1, the BPC predicts that the US government will
have exhausted its borrowing power and will either have to start
severely delaying its bills or sort through the
millions of
different payments it makes each month—on everything from national
parks to the FBI—to figure out which ones to stop paying. That's when
Social Security could see sustained cuts.
2. Federal employees will be screwed…even more. Furloughed
federal employees haven't been paid since the government shutdown began
on October 1. Congress is unlikely to end the shutdown without
raising the debt limit, meaning furloughed staffers would be unlikely to
receive paychecks anytime soon.
3. Pay and benefits for military service members and veterans will be delayed, possibly cut. The US government owes
$12 billion in
pay to active and retired military service members on November 1. Those
payments will be delayed if the government runs out of money before
then, and potentially cut, depending on which bills the US decides to
pay.
4. Medicare and Medicaid checks will be delayed, possibly cut. The US government owes
$2 billion in
Medicaid payments on October 30 and $18 billion in Medicare payments on
November 1. Same deal: If the government runs out of cash before then,
payments will be delayed, or put on the chopping block with everything
else.
5. College kids will lose their private loans and have (even more) trouble getting jobs. The Treasury Department has
warned that
after a default, interest rates will skyrocket. Nick Schwellenbach, a
fiscal policy analyst for the Center for Effective Government, says
"federally subsidized loans would likely be buffered, but education
grants funded by discretionary spending would likely stop during a
default. Additionally, increased costs of borrowing would impact
students who rely on credit cards and private loans to make ends meet.
After graduation, economic downturn and uncertainty could once again
increase unemployment rates for recent graduates."
6. Say goodbye to your retirement savings. After the
US government defaults, stock and bond prices are likely to fall
dramatically, affecting the value of retirement accounts. A default
could also trigger a financial crash that could match or surpass the
2008 meltdown, when retirement age Americans
lost 25 percent of their assets. So Americans planning to retire will likely have to postpone that move to Boca.
7. Good luck buying a home. As the Treasury Department
points out,
a default would cause mortgage interest rates to skyrocket and banks
to tighten their already super-tight lending standards, by requiring
higher down payments, among other things. It may not even take an actual
default, but the threat of one, to affect mortgage rates. During 2011's
debt ceiling debacle, interest rates jumped and stayed that way for
months. As a result, an American taking out a mortgage of $235,000 saw
an increase in monthly payments of about $100.
8. Or a car. See above.
9. Or getting a credit card. Ditto.
10. And forget that trip to Paris. A default is widely expected to
tank the value of the US dollar. That could
be good for US manufacturers, but it's bad if you're planning a
trip abroad where the buying power of the US dollar will be seriously
diminished. And the recent political turmoil is already hurting American
currency: As the government shutdown began, the dollar "sank to its
lowest against the Euro in more than seven months and its weakest level
versus the UK pound since January," the
Wall Street Journal reported.
11. That's probably for the best since your company might not be able to pay you. Commercial
paper, or short term corporate debt, is issued by many large
companies to meet payroll and accounts receivable obligations. A default
would cause commercial paper rates to spike, says
Cornelius
Hurley, a professor at Boston University's School of Law and a former
counsel to the Federal Reserve's Board of Governors. That means
corporations that don't have a lot of cash socked away "may be unable to meet payroll obligations."
12. Also, you might lose your job. According to
Hurley, post-default "unemployment will spike immediately as firms
suspend new and replacement hiring and comb their work forces for cuts."
13. And you might not be able to get a new one. According to the
Treasury Department,
"many private-sector analysts believe that [a default] would lead to
events of the magnitude of late 2008 or worse, and the result then was a
recession more severe than any seen since the Great Depression."
14. Small businesses will be hit especially hard. Entrepreneurs
don't want to take out loans when there's high uncertainty about
borrowing costs, and banks don't want to lend to businesses that don't
have an established history of success. As the Center for Effective
Government's Schwellenbach explains, "In the wake of the 2008 crash, the
credit freeze disproportionately affected small businesses. After June
of 2008, lending to small firms decreased almost 18 percent."
15. So will local governments. Schwellenbach says,
"Instability in the stock market and higher borrowing costs could
decrease confidence in municipal bonds, which are used to finance local
schools and infrastructure projects. Unlike the federal government, many
states and local governments are unable to borrow to avoid budget cuts,
if the budget doesn’t balance. Additionally, a downturn in small
business investment, potential decreases in employment, and a depressed
housing market could all deprive local governments of revenue and strain
resources."
16. And, after all is said and done, the US deficit will increase. "When
there's a threat of default"—let alone an actual default—"you see
interest rates go up on treasuries, so you have to have more government
spending to pay back the interest," says
Harry Stein, the associate director of fiscal policy for the Center for American Progress.
"So then you end up increasing the deficit. If that's really all you
care about, then you'll see that playing with the default isn't even
productive. So why are we talking about this?"
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