Government Shutdown 2021 Update: How Could a Default Affect Interest Rates?

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Now that a government shutdown has been averted — for now — the next focus is the potential threat of the U.S. defaulting on its debt, and the impact it can have on interest rates. The Treasury Department has declared that it will run out of money if the debt ceiling is not raised by Dec. 15.

Learn: Government Shutdown 2021: The Difference Between Dec. 3 Stopgap Bill Expiration and Dec. 15 Debt Ceiling Deadline
Explore: These Services Will Be Inaccessible If Debt Ceiling Isn’t Raised by Dec. 15

U.S. Treasury Secretary Janet Yellen proclaimed in November that December 15, 2021 would be the date by which the Treasury could potentially run out of money to properly allow the government to function and repay its debts.

When we speak of government default, it refers to the threat of the U.S. defaulting on its loans. The debt ceiling is the legally allowable amount of debt the government can hold in order to pay off receipts of old debts. This year in particular, the government experienced unprecedented borrowing in order to finance pandemic relief programs like stimulus payments and advance payments of child tax credits. This is borrowing that has already taken place, however, and the debt ceiling needs to be raised in order for the government to “make good” on its prior debts.

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These receipts are closing in, and the Treasury is about to run out of money to pay its future bills. The date of Dec. 15 is the current deadline by which a resolution must be found on raising the debt ceiling. If the ceiling is not raised, it could affect the average consumer in a big way.

What It Means For You

The U.S. is considered the most credit-worthy nation in the world, and has never in its history defaulted on its own debt. Due to its high credit rating, borrowing is plentiful — and cheaper than almost anywhere in the world. Should the government default in a few weeks, it could have a direct impact on borrowing costs from your bank. This means mortgages, car loans, personal loans or any kind of borrowing could become more expensive. Ultimately, this could also lead to higher interest rates. This would be in addition to and in exacerbation of a potential rate hike that is anticipated regardless throughout this year as a result of runaway inflation, rising prices, and increased wages.

See: How Social Security, Wage Hikes and SNAP Will Alleviate Inflation in 2022
Social Security Payment Schedule 2022: What Dates To Watch Out For

A default also has the potential to send shaky markets into definite bear market territory and plunge the country into another recession, not to mention the further effects it could have on global markets, as well.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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