What Would Happen If USA Stopped Paying Its Debt?

What Would Happen If USA Stopped Paying Its Debt?

The United States has more than $21 trillion in national debt. Let’s try and get our heads around just how much money that is. Firstly, what’s a trillion? A trillion is 1 thousand billion, or 1 followed by 12 zeros. That’s a big number, so let’s break it down. If we assume you are a millionaire and you have all your money in $1,000 bills, that’s 1,000 of them to make up your million…and if you stacked the bills on top of each other, that stack would be just over 4 inches high. You’d be pretty happy! Now let’s say you had 1,000 of those stacks making you a billionaire. The cash would now be 358 feet tall, which is roughly the height of a 35-story building. And what if you had a thousand of those stacks, making you a trillionaire? Well then your cash stack would be 67.9 miles high, which is more than 9 times the height that a commercial airline flies. Now that’s just 1 trillion dollars and the US debt is a cool 21 trillion.  In today’s episode of The Infographics Show, we’re going to be looking at: What Would Happen If The Us Defaulted On Its Debt?

You don’t just wake up one day and find yourself owing a stack of money that would stretch to the moon. It takes a lot of spending. 50 years ago, the US national debt was around $350 billion and the 1 trillion mile-stone was not reached until the early 1980’s. But that’s still a big jump to arrive at today’s 21 trillion. With big tax cuts, spending on things such as war, and then with economic stimulus packages, it all adds up. The debt rises because if the US government spends more money than it collects in taxes, then it needs to make up the shortfall by selling US Treasury bonds to investors. These investors are typically other countries.

So what’s defaulting all about? When a country defaults on its debt, it's called a sovereign default. If the US were to default, it would essentially stop paying the money it owed to the investors of the US Treasury bonds. There‘s a lot of speculation online about what would happen if the US stopped making these payments, and though many of the major media outlets have run features exploring this question, no one really knows exactly what would take place. The general consensus is that world markets would plunge and global interest rates would be considerably hitched up. And of course the impact would be felt by the US's creditors…those other countries, who are owed the money. Let’s take a look at 5 potential knock on effects, that would occur as a result of the US defaulting on its debt.

Depression and unemployment - The Treasury and Federal Reserve, would make their way through banks and eventually blow a hole through the Main Street economy. The unemployment rate would rise and huge amounts of uncertainty would take center stage. The stock market would suffer, with stock prices falling, as investors fled to other countries for safer stock or gold investments. Recession would be on the economic horizon.

Public service disruption – There would be no money to pay salaries or benefits for federal or military personnel and retirees, social security recipients, Medicare bills, student loans, tax refunds, and payments to keep government facilities open. The result would create a great deal of disruption and unrest across the American public.

Affect on Business - A U.S. debt default would significantly raise the cost of doing business. Companies would have to pay higher interest rates on loans and bonds to compete with the higher interest rates of the U.S. Treasury. There would be price increases on goods and services and rising inflation. Business would suffer and as a result there would be higher unemployment.

US Dollar Impact – There would be mass selling of the U.S. dollar, an event that would threaten the greenback's status as the world's reserve currency. Prices for everyday commodities would go up, our groceries, clothes, and fuel, all would rise. And we’d be saying goodbye to low mortgage rates. All of this would affect buying patterns, which again would further impact the economy.

Global Markets Impacted – The US economy has far reaching impact so it would not only be the homeland where the effects would be felt. According to CNN Money, who referenced treasury numbers in a 2016 feature, foreign nations hold just over 32% of the US debt. The list is long but China and Japan stand out with over 50% of the 32%. As an example, Japan owns about $1.14 trillion. This is equivalent to 20% of its annual economic output and would shake the Japanese economy for sure.

This speculation is all fascinating, we hear you say, but do we have anything to base the assumptions on? Let’s look at a real example in another country. The most recent debt crisis was in Greece in 2015. The country formally defaulted on a $1.7 billion payment to the International Monetary Fund in Athens. Nowhere near a trillion, but it was still hugely disruptive to this Balkan tourist destination. The Guardian ran an article last year, looking at the effects of the Greek default. They referenced a study by the DiaNeosis thinktank, which found that in 2015, 15% of the population, or 1.6 million people, earned below the extreme poverty threshold, when 6 years previously, in 2009, that number did not exceed 2.2%. And according to the Bank of Greece, the net wealth of Greek households fell by a staggering 40% in the same period. Though unemployment did drop, it is still the highest in the European Union at 22%. What did this mean to an everyday Greek person? One example is Chryssa Christodoulaki, a French-trained hairdresser had paid into a pension fund for almost 45 years. Her pension started out at €1,750 a month. Then it was cut to €1,430 a month, and then cut again to €960 a month.

It’s not a pretty picture, but then how realistic is the prospect of the US defaulting on its debt? From everything we researched, it certainly seems highly unlikely. One reason is that all U.S. government debt is denominated in U.S. dollar assets, but a more intriguing reason the US would apparently never default, in the words of Alan Greenspan, an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006, is that "The United States can pay any debt it has because it can always print money to do that. So there is zero probability of default." We’re not entirely sure how true that is, but it’s certainly an interesting idea to consider.

So, what do you think would happen if the US defaulted on its debt? War? Famine? The Apocalypse? Let us know your thoughts in the comments! 

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