Debt Ceiling 2023: If the US Defaults, What Happens to Your Own Debt?
The U.S. could fail to pay all of its debt as early as June 1, which would send shockwaves through the economy and financial markets. But what would happen to ordinary Americans?
After Treasury Secretary Janet Yellen announced earlier this month that the U.S. was running out of time to pay its bills, borrowing costs for the government jumped to 5% for June. But this was predictable, NBC News reported.
Previously (in 1979), the U.S. defaulted on its debt by accident due to a series of events that caused a temporary delay in payments to investors redeeming U.S. Treasury bills, according to Reuters. Reuters indicated this pushed up borrowing costs by 0.6%, and an academic paper published a decade later argued that said defaid permanently elevated borrowing costs for the United States.
Howard Gleckman, senior fellow of the Urban-Brookings Tax Policy Center at the Urban Institute, said if the U.S. were to default again, the result would be the same. “The primary effect would be interest rates going up significantly,” Gleckman told NBC News. “And they’re already going up quickly and steeply. What this would do is accelerate movement toward higher interest rates.”
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If the U.S. were to default, interest rates would skyrocket for would-be borrowers. Individuals and businesses would have trouble getting loans, and Zillow estimates that a prolonged government default would push mortgage rates up to about 8.4% from the 6.4% interest rate on a 30-year fixed-rate mortgage that we see today, per Freddie Mac.
While this wouldn’t affect fixed interest rates, the impact would be felt by those looking to take out a loan or those with variable interest rates. Zillow predicts that unemployment rates will jump from 3.4% to a peak of 8.3% by October — if a default does occur, that is — which could affect how millions are able to pay their current debts.
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