With little time to spare, the U.S. government dodged a disastrous default on its debts, as the House and Senate passed an emergency bill to raise the country's debt ceiling and President Obama quickly signed it into law. The new legislation authorizes an increase of $2.4 trillion in additional government borrowing.

TUTORIAL: Introduction To Banking And Saving

But what exactly would've happened or could've happened if a bi-partisan deal on raising the country's debt ceiling was not consummated? A default means that some or all of the people, businesses, institutions and governments that the U.S. owes money to would not be paid. They may be paid eventually, but not in the immediate wake of today's deadline when the U.S. would've theoretically run out of money. (For additional reading, refer to How Countries Deal With Debt.)

The Worst-Case Scenario
A worst-case scenario is depicted below, but none of this or only some of it might've occurred if the U.S. had defaulted. Depending on how quickly and comprehensively the post-default problems were resolved, the U.S. economy may not have suffered a long-term crippling injury. In the most extreme case, it could take years or a decade or more for the economy to recover sufficiently after a government default for the U.S. to regain its formerly stable economic footing.

Money would continue to come in to the government, but not at the necessary rate to pay all its obligations because the debt ceiling of $14.3 trillion - the amount of money the U.S. may borrow, as mandated by law - would have been reached if the ceiling had not been raised.

Consequently, the government would have had to decide who gets paid and who doesn't. Entitlement programs might have been among the first to feel the cash crunch. Social Security, Medicare and Medicaid recipients might have been short changed. Military veterans who receive pensions and other retired government workers, including legislators, judges, federal attorneys and others might have seen a reduction in their monthly checks. Defense contractors - the big firms that manufacture weaponry, aircraft, seagoing vessels - may also have been hit with partial payments of what the government owed them, or payment might have been suspended entirely until more money became available.

Another immediate consequence of a default is a lowering of America's credit rating by the major ratings agencies, Moody's and Standard & Poor's. That means with U.S. Treasuries deemed more risky, higher interest rates would have to be offered to attract lenders. The result of higher rates would ripple through the entire U.S. and global economies.

Impact on the Individual Consumer
For the individual consumer, there'd be higher rates for credit card purchases, mortgages, consumer loans of every variety. For businesses, both mature and start-up, higher rates would be charged for loans to expand, replenish inventory, purchase new technologies, hire more personnel. Stock prices would decline accordingly as economic growth is hampered. Venture capital, used to finance new businesses, would also become scarce as the economy slows, adding another obstacle to growth and employment.

Government funding of many programs which once stimulated economic growth would be curtailed or stopped. These would include government subsidies to industries such as agriculture, energy, transportation. Government grants and loans to college- and university-bound students would dry up, preventing gifted or financially strapped young people from getting a higher education and thus limiting their job opportunities.

As stock and real estate prices declined, endowment portfolios of colleges and universities would shrink, further limiting the funding of scholarship programs and student loans.

Primary research in technology, the sciences and medicine could also be impacted as both government and private sector money dried up. There may be a reduction in the development and testing of new drugs. Patents for high tech inventions and copyrights for computer software applications, may not come as frequently as they did when these sectors were powerful drivers of a booming economy.

Much needed infrastructure repair and rebuilding will of necessity be put on hold until more money became available to finance these projects.

A final result if this worst-case scenario had come to pass in all its horrifying economic damage, the U.S. standard of living would have declined unpleasantly, and the country's preeminent position in the world of economic stability and reliability, as a prime source of innovation in the sciences and technology, and as the most powerful nation militarily as a bulwark against war and aggression would be severely weakened.

But, that's only if the worst occurs.

The Bottom Line
Almost all economists and a majority of both Democrats and Republicans and most political independents agree that the debt crisis had to be resolved and U.S. debt obligations had be paid. The points of disagreement were in the methods and numbers - should taxes go up or remain where they are, should tax loop holes and deductions be eliminated, where should government expenses be cut?

These are the questions that the nation must confront again, if and when the higher debt ceiling is reached, which seems inevitable according to a consensus of economists if spending continues at its current pace and new government revenues are not obtained. If these problems are not solved, you can anticipate some or maybe all of the above calamities to befall the country with varying degrees of severity should the U.S. default on the new $2.4 trillion addition to the debt ceiling. See Credit Default Swaps: An Introduction.)

Related Articles
  1. Economics

    What is the Paris Club?

    The Paris Club is an informal group of nations that meet to find solutions for problems facing debtor nations.
  2. Economics

    How Does the Puerto Rican Debt Crisis Affect the US?

    Learn about the specifics of the Puerto Rican debt crisis and why economists disagree on how significantly it could affect the United States.
  3. Economics

    The Origins of the Puerto Rican Debt Crisis

    Learn why heavy bond issuance, economic decline, oppressive social spending and a declining population combined to bring about Puerto Rico's debt crisis.
  4. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  5. Economics

    The Economics of Raising the Social Security Age

    Briefly examine the economics behind raising the retirement age for Social Security benefits and how it could impact the federal budget.
  6. Economics

    China Looking to Deleverage its Existing Debt

    Learn about a possible debt bubble developing in China, and how the Chinese government may be selling assets to deleverage some of this debt.
  7. Economics

    China Owns US Debt, but How Much?

    See how much U.S. debt is actually owned by the Chinese, what it means to the economy, and why China is willing to lend so much money.
  8. Economics

    Sacrifices Necessary to Keep Puerto Rico Afloat

    After years of band aids and significant borrowing to meet its obligations, the time has come for meaningful reform in Puerto Rico.
  9. Economics

    Would More Government Debt Help The U.S. Economy?

    Many economic policy experts are once again asking: “What, if anything, can be done to accelerate the United States’ persistently soft recovery?”
  10. Economics

    The Top Reasons Behind The U.S. National Debt

    National debt, as with a business, is basically the difference between receipts and expenses--but in the U.S., the latter has far outpaced the former. Why?
RELATED FAQS
  1. How will a value added tax impact the government budget?

    In 1992, the Congressional Budget Office conducted an economic study on value-added tax, or VAT. At the time, the CBO concluded ... Read Full Answer >>
  2. What austerity measures can a country implement to curtail government spending?

    Broadly speaking, there are three types of austerity measures. The first is focused on revenue generation (higher taxes), ... Read Full Answer >>
  3. What are some historic examples of hyperinflation?

    Hyperinflation is an extreme case of monetary devaluation that is so rapid and out of control that the normal concepts of ... Read Full Answer >>
  4. What are the typical day-to-day responsibilities of a Chief Operating Officer (COO)?

    A country's debt crisis affects the world through a loss of investor confidence and systemic financial instability. A country's ... Read Full Answer >>
  5. What are the pros and cons of operating on a balanced-budget?

    Few issues are more complicated, contentious and controversial in contemporary American politics than balancing the federal ... Read Full Answer >>
  6. Which countries run the largest budget deficits?

    The countries with the largest budget deficits as of March 2015, in order, are Kuwait, Macau, the Republic of Congo, Norway, ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center