What Happens If the U.S. Defaults on National Debt?

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Jun. 24 2021, Published 1:44 p.m. ET

The U.S. debt ceiling is always rising. The government has never defaulted on debt because Congress has continued to raise the debt ceiling over the course of the nation's history. Currently, the deficit is about $28 trillion.

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What happens if the U.S. is forced into defaulting on the national debt? Here's what we know.

Two ways the U.S. government could default on its debt

With an ever-increasing national deficit, the U.S. could default on its debt in one of two ways.

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The first has to do with Congress, which has threatened to cap the debt ceiling and force the U.S. government into default. If there's a firm cap and the U.S. exceeds it, a default would be automatic.

The second has to do with interest. If the U.S. stops paying the interest on its debt, the government automatically defaults.

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The dire consequences of a U.S. debt default

The U.S. deficit often feels like an arbitrary thing considering it's always rising. However, it's anything but arbitrary. If the government were to default, tough consequences would ripple out on a global scale:

  • Interest rates would soar. Currently, the federal interest rate is extremely low while the economy recovers from the COVID-19 pandemic. However, a U.S. debt default could shift this far into the other direction. It would cost businesses, governments, and loan recipients of all kinds a lot more to borrow money.

  • The value of the U.S. dollar would take a beating. Not only that, but the U.S. dollar would lose its place in the list of global world currencies. Meanwhile, investors would hop on other world currencies like the euro or yen.

  • U.S. import prices would rise through the roof, which would make it extremely expensive to live in the country. Inflation would hit hard and fast.

  • Any government employee would be out of luck for their paychecks. Also, any citizen receiving or set to receive Social Security, Medicare, and Medicaid benefits would lose those programs entirely. Payments on student loans, tax returns, and government facilities would shut down. Unlike a government shutdown that impacts only non-essential programs, the impacts of a U.S. debt default would be far-reaching.

  • U.S. credit rating downgrades can tank stock markets too. American wealth and stability in many forms would be in turmoil.

The U.S. isn't infallible

The debt ceiling has been raising your entire life, so it's understandable if you think it can go on forever. However, the government is fallible. If spending continues to exceed available capital, the nation will have a big problem on its hands.

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How can the U.S. avoid defaulting on its debt?

The only way to avoid true default is to minimize the budget deficit. President Biden's corporate tax proposals within the nation and globally could put a massive dent in the deficit over time. If anything, it could help the deficit from increasing at such a rapid rate. Spending during the COVID-19 pandemic has been huge, but these programs aren't forever.

Until then, the government will just have to keep paying its interest and working with Congress to avoid defaulting.

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