The United States has historically been one of the most credit-worthy countries in the entire world. U.S. Treasury bonds are considered some of the safest financial instruments in international markets, and their movements are used as a benchmark for movement within the global economy.
The U.S. is also a debt nation — we all have some form of it, be it with monthly credit cards, student loans and mortgages. It’s hard to think of a world where you can’t just go to a bank and get a mortgage for your first house or open up even a low-limit credit card — but the reality is the U.S. is a privileged place in terms of the free-flowing credit most of its citizens run on.
That could change in the next 10 days. During President Donald Trump’s presidency, the national debt climbed over $8 trillion largely fueled by massive tax cuts and emergency pandemic spending. The Biden administration, thus far, has increased the county’s debt by about another $3.5 trillion with the American Rescue Plan stimulus relief bill and other economic recovery efforts during the ongoing pandemic.
The government fiscal year ends Sept. 30 and a new budget will need to be agreed on in order to fund the spending that has already happened.
How The Government Funds These Big Spending Bills
Using this year as an example, the government essentially took out a $3.5 trillion loan against itself in order to pay for things like stimulus payments, business relief, etc. Now, it is time to pay that loan back — this is done in the form of bonds. The government agrees on a certain level, or debt ceiling, of debt to issue in the form of Treasury bonds. These bonds are then sold into the open market at monthly auctions held by the Treasury itself. This, plus taxes you pay, raises the revenue needed for things like government spending.
The government is now asking for the amount, or limit/ceiling, of these bonds to be increased so that they can pay off their debts. There is much conflict in the government as to whether or not this should happen, but the important thing to know is that should there be a vote “No” in raising the limit of bonds to issue, the U.S. will default for the first time in its history.
What A Default Mean For You
In short, all of the loans that maintain your daily life — mortgage, credit card, car loan — could get more expensive. One of the reasons debt is so cheap in the U.S. is because of its creditworthiness, which could change if it defaults. U.S. Treasuries are usually bought by banks, increasing the money supply into the economy and keeping money “easy ” and cheap. If more bonds are not issued into the marketplace, banks will have to tighten the reins and lending will get more expensive.
U.S. Treasury Chair Janet Yellen recently warned of the extent to which average Americans can be affected in a piece for the Wall Street Journal. Yellen stressed that “In a matter of days, millions of Americans could be strapped for cash. We could see indefinite delays in critical payments. Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays. America, in short, would default on its obligations.”
She added that it could also trigger a financial crisis with a spike in interest rates, a steep drop in stock prices and that ” our current economic recovery would reverse into recession with billions of dollars of growth and millions of jobs lost.”
More From GOBankingRates