If the US government does not extend the continuing resolution to pay things. (By next month):
1) We default. By defaulting all investments in government bonds set to come due from this point forward would not be paid. This would cost billions of dollars in investment money immediately as people are not being paid. Additionally it means that few would invest in them in the short term future which would cost billions more. Additionally any federal bonds taken to say build new schools, build a government building, establish a park, or the like would also likely not be paid possibly putting thousands out of work who would otherwise be employed by those projects.
2) Federal Employees would continue to be in shut down. Those on furlough would have to do without being paid knowing that they will get back pay, but those who are simply getting the equivalent of unpaid vacation would likely have to start getting other jobs after being unpaid for a full month.
3) Without the extension of the budget all the “emergency” funds will be use up in the Federal pension plans, Veterans retirement and disability pay, Social Security, and Disability pay will not be given next month. This means there will be Hundreds of thousands unable to pay bills since most of these type of people live pay-check to pay-check.
So while the default by itself will mostly only effect the rich and upper middle class who invest, all the things that are connected with it will put hundreds of thousands without pay, hundreds of thousand more without jobs, and the economy in a massive death spiral.
…Also in some shape or form we should see inflation of our money system. This means you should immediately pay off any variable rate loans you have outstanding and don’t really bother trying to save cash such as a savings account, any inflation would potentially null your savings quickly.
(The worry isn’t that the banks will collapse, it is that the dollar will collapse. Money — especially fiat money like the modern dollar — is based on a confidence game. It is valuable because people think it will be valuable to others, in the future. Gold and other physical standards for money retain value because they’re useful and rare. Fiat currencies retain value because people have faith in the organization that defines the currency.
The U.S. was such a major economic powerhouse coming out of World War 2 that the whole world basically adopted the dollar as a “reserve currency” – a way to store and manage wealth, rather than merely to deploy wealth. If confidence in the U.S. government’s ability to manage the dollar is shaken badly enough, then many countries will migrate from the dollar to other forms of wealth storage. That will greatly increase the number of dollars in the “open market” of the world, and the dollar itself could rapidly lose value.
So your money is just as safe in the bank as in bills — but that’s because the Republican threat isn’t to the bank, it’s to the dollar itself.)
I feel like I would need a Master’s degree in English History just to give Stephen Fry an adequate hand job.
Picture, meet and get to know the wall of my cell phone, because you two are going to be together for a long time.
I’d love to see a volcano before I die. Like, right before I die. I want to throw myself into a volcano…
My dream home is a fishermen’s cottage in some yet to be determined Scandinavian country.
I can’t wait for the future when we have domesticated bears.
I’m voting for Dwight D. Eisenhower in 2016. Somebody go dig him up…
I’m in almost total agreement with the Eisenhower-era Republican party platform.
What will probably happen in Europe if USA goes in default?
This post will be structured in 2 parts:
Who owns the debt by the government
What would the effects be of defaulting
The US defaulting on its debts has both internal and external effects. The total of US government debt is over $ 16.7 trillion. Of that debt, $ 4.8 trillion is owned by governmental agencies.
This includes agencies such as the social security (holds over $2.5 trillion dollars).
Of the public debt, $5.7 trillion is owned by foreign investors.
Keep in mind this is just the actual government debt, effects of a default would be much bigger
Now, what would happen in case of a default? Let’s assume you own a $1000 bond by the US government. You might think it’s just paper, but that’d be wrong. After all, you paid for that paper. Just like an iPod is worth $500 or whatever because that’s what you paid for it. Bonds are means of (safe) investment.
Now, government defaults. You, the owner of the government bond are unsure about whether you will actually ever get your money back, so you’re freaking out. Then some dude comes to you and says “hey, I’ll pay you $500 for that bond!”. You figure “better be sure” and accept it (this 50% depreciation is completely arbitrary).
Now, let’s assume everyone reacts like you do (which is entirely unlikely but let’s assume so for sake of simplicity). Consequence: the value of the government debt drops by 50% for the owners of that debt. Social security loses over $ 1 trillion, other government agencies or internal investors lose a combined $3 trillion.
To put this in perspective, this is roughly $10 000 per American for a 50% drop. Even assuming just a 1% drop, it’d still be $200 for every American out there. Family with 3 kids? Well shucks, you just lost $1000 (in actual assets or in government benefits, this is on a macro level).
Foreign owners of the debt would see the same effects: the value of their assets would fall. China owns $1 trillion in debt, so loses $500 billion. Same with Japan. Both countries have been rumored of being on the verge of an economic crisis, and this would definitely trigger it.
Worldwide, about $3 trillion in assets would disappear. Again, assuming a 50% value drop which, again, is really unlikely.
Now, let’s look at the much major second-order effects. The dollar would drop in value… really hard. Since the dollar is basically the global reserve currency, a lot of foreign companies (be it from India, Bulgaria, Ecuador… you name it) have dollar bank accounts.
Since the dollar would drop in value versus basically every other currency, a lot of those companies would lose a lot of their assets too. Same (and especially) with the banks.
A whole lot of the global economic system is basically based on the stability of the dollar as a reserve currency. The US defaulting would have an effect on the entire global economic system.
I don’t want to sound like a doomsday prophet here, but if shit actually hits the fan a default would likely lead to a domino effect of banks going bankrupt. Remember when that happened with Lehman Brothers and how hard that one single bank going bankrupt shook the global financial system? We avoided a financial collapse at that point by letting the governments bail them out. Thing is, in this scenario the most (powerful) governments wouldn’t be able to bail them out either.
Then you get to the third-order effects. Banks go bankrupt. Before you all start shouting “YEAH, FUCK THE CAPITALISTS!!!”, this means that everyone who has an account with a bank (savings account, investment account or whatever) will lose their money. Companies, but the average family too.
***I will stress again that this is all worst-case scenario. Just keep in mind that the EU did everything it could to avoid Greece going bankrupt, and then consider the difference between the Greek economy and the US economy on a global scale. Should give you an idea of how bad it could be. This would be far worse than the Lehman Brothers collapse (many people still don’t realise how close we were to a global collapse of the economic system).