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Published: May 17, 2023 7 min read
Wallet with white house in the background
Eddie Lee / Money; Getty Images

Within weeks, the U.S. government could run out of money to pay all of its bills and default on its debt if Congress doesn't reach an agreement and act on the country’s debt limit.

While lawmakers still appear far apart on the details, officials, analysts and economists largely agree on one thing: In the unlikely case the U.S. were to default on its debt, the consequences would be far-reaching.

Secretary of the Treasury Janet Yellen has predicted that the U.S. could become unable to pay its obligations as soon as June 1. She laid out the stakes in a letter Monday, writing that “if Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”

The debate surrounding a U.S. debt default — and the economic fallout if it were to occur — may sound abstract, but there are several concrete ways a potential default would affect your wallet.

1. Social Security and other benefits could be delayed

If the government was unable to pay its bills, federal payments could be delayed for programs like Social Security, Medicare, Medicaid, SNAP and others.

According to the nonprofit Bipartisan Policy Center, there are two main ways the process could unfold. One, the Treasury Department could pick which benefits to pay out on time and which to delay. Or, two, the department could pay all benefits out in full but delay them until it draws in enough revenue.

In either case, federal benefits would be delayed (to some extent). Even a modest delay would affect the income of millions of Americans. More than 70 million disabled or retired Americans rely on timely monthly Social Security checks, and more than 40 million people receive government food assistance.

“Even a short delay in the payment of Social Security benefits would be a burden for the millions of Americans who rely on their earned benefits to pay for out-of-pocket health care expenses, food, rent and utilities,” the left-leaning National Committee to Preserve Social Security and Medicare said in a recent statement.

2. Unemployment would spike

Throughout the recent economic turmoil of soaring prices, rising interest rates and banking meltdowns, there’s been a bright spot: the labor market. According to the latest employment report from the Labor Department, the unemployment rate was a historically low 3.4% in April, and the economy added far more jobs than expected.

But following a debt default, that bright spot would surely darken.

Economists at Moody’s Analytics project that if the U.S. government breaches the debt limit by even a few days, the unemployment rate would jump up to 5%, and 1.5 million Americans would lose their jobs.

However, if the breach were to drag on for several weeks, the effects would be much harsher: The unemployment rate could spike to 8% and nearly 8 million people could lose their jobs, especially in areas with a high density of federal government workers and contractors, who would likely be furloughed or laid off. This could particularly impact Washington D.C., northern Virginia, Alaska, Hawaii and New Mexico.

“The economic downturn that would ensue would be comparable to that suffered during the global financial crisis,” wrote the Moody’s economists.

3. Borrowing would cost even more

Interest rates have already been steadily rising due to 10 consecutive rate hikes by the Federal Reserve as part of its fight against inflation.

When interest rates rise, it becomes more expensive to borrow money for everything from personal loans to credit cards and mortgages. When the Fed does this slowly and predictably, the intended effect is to slow down the economy — and lower inflation — without sending the U.S. into a recession.

However, an unexpected shock like a debt default would spike interest rates further, economists say, and likely spark a recession.

“If policymakers actually do fail to increase or suspend the limit before the Treasury runs out of cash and defaults on its obligations, interest rates will spike and stock prices will crater, with enormous costs to taxpayers and the economy,” Mark Zandi, Moody’s chief economist, said in testimony before the Senate Banking Committee in March.

4. The housing market could go into a 'deep freeze'

If the U.S. defaults on its debt, the already tattered housing market would be sent into a “deep freeze,” according to a recent report by Jeff Tucker, a Zillow senior economist.

Tucker projected that home sales would plummet, mortgage rates would climb to as high as 8.4%, and buyers' mortgage bills would soar by over 20%.

“Any major disruption to the economy and debt markets will have major repercussions for the housing market, chilling sales and raising borrowing costs,” Tucker said Thursday, “just when the market was beginning to stabilize and recover from the major cooldown of late 2022.”

5. Stock prices could tumble

Economists say stock prices will crater if the U.S. defaults.

Treasury bonds and bills are generally seen as being risk-free because they're backed by the government. As such, they act as the “plumbing” of financial markets, Jonas Goltermann, a markets economist at Capital Economics, explained during a panel Monday. But if the Treasury could not make its payments, it could start a chain reaction that would affect the broader stock market.

Moody’s predicted that, under a prolonged default scenario, stock prices would plummet by one-fifth, wiping out about $10 trillion in household wealth.

Even if the U.S. doesn’t default, Goltermann noted that markets could fall sharply if lawmakers wait too long to act. In 2011, last time the U.S. approached a debt default, markets slid more than 10%, he said, and continued falling even after lawmakers passed a bill to avoid a default.

Debt ceiling FAQs

What is the debt ceiling?

The U.S. government does not bring in enough revenue through taxes to pay all of its bills, and it has to fund that gap by going into debt.

The debt ceiling — aka the debt limit — is a statutory limit to the amount of money the federal government can borrow to meet its financial obligations. Those obligations include Social Security and Medicare payments, money due to government bondholders and creditors, military salaries, tax refunds and more. The current debt limit is $31.4 trillion.

When is the debt ceiling deadline?

The U.S. hit the current debt limit of $31.4 trillion in January. Since then, the federal government has taken "extraordinary measures" to ensure it has enough cash on hand to meet its current obligations, but that money is dwindling.

When those extraordinary measures are exhausted — on the so-called "X-date" — the U.S. is at risk of defaulting on its debt.

The X-date could come as early as June 1, though it's mostly expected to happen by August at the latest. Experts say the exact date is difficult to predict because no one knows precisely how much money the federal government takes in or pays out on any given day.

What happens if the U.S. defaults on its debts?

If the U.S. defaults on its debt, that means it does not have enough money on hand to pay its bills. The U.S. is largely believed to have never defaulted on its debt (though Reuters reports that it did technically default in 1979 due to check-processing glitches).

A debt default is not likely to happen. Even under the current gridlocked circumstances, Moody's Analytics puts the chances of a default happening at 10%.

If a default were to occur, the adverse effects are difficult to overstate. Experts largely predict the U.S.'s credit rating would drop, gross domestic product (GDP) would fall, stock prices would plummet, unemployment would increase, and federal government benefit payments would be delayed.

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