Gov. Running Out of Money - Debt Ceiling

What happens if the government runs out of money?

A report from the White House Council of Economic Advisors in October 2021 warned of the possible effects of the U.S. defaulting, which include a worldwide recession, worldwide frozen credit markets, plunging stock markets and mass worldwide layoffs.

The government is on track to run out of money to pay its bills this summer, setting the stage for a partisan confrontation that could spiral into an economic or constitutional crisis or both.

Ever since January, the government has been running its finances on borrowed time. That month, the Treasury reached the $31.4 trillion limit that Congress allows the government to owe to pay for obligations Congress has already authorized.

Accounting maneuvers by the Treasury have kept the lights on at government agencies, and have continued paying Social Security benefits, military salaries, and the government’s other bills while Republicans and Democrats grapple over how to avert the impending crisis—which they may or may not do.

The Treasury’s “extraordinary measures” will work for a while—depending on how much the IRS collects in taxes, that could be until early June or as late as mid-August, economists say.

Here’s what else you can expect if the U.S. defaults on its debt.

A sell-off of U.S. debt

A default could provoke a sell-off in debt issued by the U.S., considered among the safest and most stable securities in the world. Such a sell-off of U.S. Treasury's would have far-reaching repercussions.

Money market funds could see volatility

Money market funds are low-risk, liquid mutual funds that invest in short-term, high-credit quality debt, such as U.S. Treasury bills. Conservative investors use these funds as they typically shield against volatility and are less susceptible to changes in interest rates.

However, in the past, money market funds made up of U.S. Treasurys have seen increased volatility when the U.S. ran up against debt ceiling limits and signaled potential government default. Yields on shorter-term T-bills go up because they are impacted more compared with longer-term bonds, which gives investors more time for markets to calm down.

(Note that money market funds aren’t the same as money market deposit accounts, which are a type of federally insured savings account offered by financial institutions.)

Federal benefits would be suspended.

In the event of a default, federal benefits would be delayed or suspended entirely. Those include: Social Security; Medicare and Medicaid; Supplemental Nutrition Assistance Program, or SNAP, benefits; housing assistance; and assistance for veterans.

Although a default wouldn’t affect Medicare and Medicaid recipients directly, delays in payments to providers could make them reluctant to treat Medicare and Medicaid patients.

Stock markets would roil

A default would likely trigger a downgrade of the U.S. credit rating — the S&P downgraded the nation’s credit rating only once before, in 2011, after a last-minute debt ceiling deal was reached. A credit downgrade happens when an international credit rating agency, like Standard & Poor’s, determines the country’s risk of defaulting on sovereign bonds has increased relative to other peer nations or an average, said Andrew Hanson, assistant professor of economics at the University of Tennessee, Knoxville, via email.

What happens if America defaults on debt?

2 days ago - May 23, 2023 reported.

Moody's Analytics, a research outfit, estimates that in the immediate aftermath of a default, America's economy would shrink by nearly 1% and its unemployment rate would rise from 3.4% to 5%, putting about 1.5m people out of work.

Who is United States in debt to?

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.

This blog was report by Mad Money News with Alexis Evans of SFBA.