In one word, default. This means the government will not be able to pay all of it’s bills that are due. The US government collects approximately .65 in tax revenue for every one dollar it spends. Once approximately 65% of the total due bills are paid, the money would run out and the remaining 35% of those who are expecting payments would not get paid unless the debt ceiling is raised and we borrow the additional money. The underlying main issue here is overspending. Who would not get paid if we default? The administration has not been clear at this point. Exactly who would get stiffed on what determines the resulting trouble that would occur. We’ve heard Social Security payments could be missed which could wreak havoc on our economy. The political & financial experts are saying that there is no way that the US will not make it’s interest payments on US Treasury securities that is due to investors worldwide, as that could lead to a global financial meltdown much worse than 2008.
US Treasury securities have been considered to be extremely safe financial vehicles. If the investors are not paid what they are due, the “trust” of the US financial system decreases which could drive interest rates up to accommodate more risk taken on by the investor. Government bonds, notes and other securities that are a vital part of our economy to raise money may no longer be valued as solid investments.
Can the government prioritize payments to prevent a global financial crisis? Again, unclear. Mr. Obama has said that they might consider payment prioritization, but Treasury secretary Jack Lew has said that this would put a strain on the automated payment systems that would provoke “chaos”. Currently, bills are scheduled for autopay in a particular order. It’s been said that they don’t even know if it’s technically possible to prioritize at this point. (The truth is that it’s very likely to be technically possible with enough time, money and the right contractor, but that’s another story).
What happens if debt ceiling is not raised and the subsequent default mean for you? A default could mean higher interest rates for home loans and credit cards and it could also mean a tanked stock market with our investment portfolios taking a serious hit. Another economic crisis worse than the recent Great Recession would not happen instantly, but as the effects kick in, we could be laden with higher unemployment, a big slump in the housing market, and effects more profound than what we’ve seen in the past 5 years.