A Potential US Government Default: Why Would It Happen and What Does it Mean?
May 30, 2023
Recently, Treasury Secretary Janet L. Yellen has warned that if Congress refuses to raise or suspend the debt limit, the United States could potentially face a default before June 1st. The situation is pressuring President Biden and lawmakers to reach a swift agreement in order to prevent the country from failing to meet its financial obligations.
The US national debt refers to the amount of money the federal government owes to creditors. When the government spends more than it earns, it leads to a budget deficit. The government then issues debt in the form of Treasury securities in order to cover the deficit. The US has run a deficit for the past two decades, which significantly contributed to the growth of the national debt. As of now, the current debt is at $31.4 trillion.
It’s hard to predict the potential outcomes of a US debt default as the country has never actually defaulted before. If the US actually defaults, much of Congress would probably be fine, but many others would not. If the US defaults and there’s no more money left to spend, the government won’t have the cash to run basic operations, such as schools and roads. And in today’s case, the US is facing additional financial issues. The growth of the country’s senior population and life expectancy puts pressure on programs that serve older Americans, like Social Security. Healthcare costs continue to rise, and it remains the second fastest-growing part of the US budget.
If a default were to occur, a US recession (a significant prolonged decline in economic activity across the economy) would also be likely to occur. Experts believe it would be due to the disruption and shock to financial markets and the widespread effects resulting from it. Unemployment could spike, as well as a halt in lending activities, and overall, the economy could shrink.
