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Wednesday, October 9, 2013

What happens if the USA defaults?

The skyrocketing U.S. national debt is a substantial economic problem
U.S. credit is linked to global economics
By Mark Aselstine

A generation ago, the thought of the United States of America defaulting on it’s debts was simply inconceivable.

First of all, debt was only a minor problem at the time for a country where it’s largest ever generation (the Baby Boomers’) were in the middle of their careers, their earning powers and therefore the amount of taxes which they were paying.

How things have changed.  The Boomers are beginning to retire and the economic collapse of 2008 in combination with 2 lengthy wars have led the US federal deficit to run at an all time high.

Given the inability of Democrats and Republicans to have even a basic conversation, I think it is important to consider what might happen if the debt limit (debt ceiling as it is sometimes called) is not raised and the US defaults on its debt.

Who gets paid first? 

According to the Treasury Department in 2011 (the last time, ok probably the only time that a default seemed like a possibility) the government would not issue checks for a partial days bills, instead they would wait until they cover a full set of expenses for a single day.  That means in essence they wouldn’t pick and choose, if there wasn’t enough money in Uncle Sam’s account, no one gets paid. That means defense contractors, school and welfare recipients all have to wait in line for their checks. Given that the federal government only takes in 70 cents for every dollar it spends, the line would get pretty long, pretty quickly.

On Oct 31st, the meltdown occurs

You might be wondering why October 31st is likely to be a day of reckoning in financial markets. Here’s why.  The US federal government has a $6 billion dollar debt payment due on that day and the likelihood of default on that payment given the amount of likely missed payments before that date, is virtually certain. The stock market will (not might, will) crash and America will see it’s credit rating sitting next to Greece and Spain before nightfall.  That credit rating is a significant issue if the government plans to resume borrowing money at any point again in the future as it currently enjoys the world’s lowest interest rates.

What you continue to hear from the financial sector is pretty simple-yes a default is going to be a really, really bad thing in the short term.  That being said it is worse for military families and other affiliated businesses, than it is for the average person working in private industry.  Private industry and the financial markets only have a single real hope, that this crisis can spur some long-term action in regard to the national debt because continuing to spend a dollar for every 70 cents that you bring in, simply isn’t sustainable. Maybe, just maybe a crisis of this proportion is what policy makers and politicians need in order to realize that their actions, or lack of action have real consequences in terms of the economy and people’s livelihoods.

About the author: Mark Aselstine is the owner of Uncorked Ventures an online wine club based in San Francisco.  While he might not be direct affected by the shutdown and impending collapse, if his high end customers are concerned they might stop buying wine, perhaps entirely.  For his business and for his family, that's a really, really bad thing.

* Image license: Woodsy; RGBStock royalty free