What would happen in the event of a U.S. debt default in 2011?

Even toying with the idea that the U.S. could default on its debt obligations probably has foreign lenders looking for new places to park their surplus capital.

With the drama surrounding Friday’s near-shutdown of the federal government, it’s easy to forget there’s a bigger problem looming: the need to raise the federal government’s debt ceiling. As it stands, government debt is currently capped at $14.3 trillion, and we’ve rung up some $14.287 trillion in debt (and climbing), Reuters reports.

The Treasury estimates we could bump up against the debt ceiling as early as mid-May, although we may be able to extend D-Day as late as July 8. Hitting the debt ceiling sounds innocuous, but the implications are downright scary: if Congress doesn’t raise the ceiling, the U.S. would, in effect, default on some of its loans as there would be little other way to meet the government’s spending obligations.

The only alternative would be balancing the Federal budget overnight, and – according to NPR – that would require slashing spending by 40 percent, raising Federal tax receipts by 40 percent or some combination of the two (translation: it would be all but impossible without crumpling our economy).

If a debt default did happen, it would make the 2008 financial crisis look like child’s play. Treasury Secretary Timothy Geithner was on Capitol Hill last week trying to drive home that fact with Congress. Here are just a few of the problems he sees if the government fails to raise the debt ceiling:

  • Dramatic rises in borrowing costs for all Americans
  • Decreased payments to the military
  • Cuts in social security
  • A surge in unemployment
  • “Thousands, if not hundreds of thousands” of business failures

Defaulting on our government debt, Geithner added, would “call into question the willingness of the United States to meet its obligations” and this would “shake the … foundations of the entire global financial system.”

On top of Geithner’s concerns, we’d probably see more problems:

  • The death of the U.S. dollar’s status as the world’s reserve currency
  • A downgrade of U.S. sovereign debt
  • Hyperinflation
  • A stock market collapse
  • Decreased or complete cessation of payments for Medicaid, Medicare, Social Security, military pensions and other government programs
  • An IMF bailout of the U.S. government
  • Draconian spending cuts imposed by foreign lenders
  • Mass layoffs for state and federal employees
  • School closings and consolidations
  • Protests, demonstrations and widespread civil unrest

In the words of President Obama’s White House spokesman Jay Carney, “failing to raise the debt ceiling would be Armageddon-like.” No matter what your politics, it’s hard to argue with Carney.

Even toying with the idea that the U.S. could default on its debt obligations probably has foreign lenders looking for new places to park their surplus capital. Let’s just hope our Congressmen realizes that there are some issues that take precedence over political maneuvering. We elected them to protect our interests, and raising the debt ceiling is in the interest of everyone.

Related

ONE RATIO TO RULE THEM ALL


Sprott silver predictions calling for uncharted gold-silver ratio


BATTLE BEHIND THE GREAT WALL


Facebook + Baidu vs. Renren: Let the war begin (BIDU)


SILVER SHEEN


Silver price record could fall in 2011


ARTIFICIAL MARKETS


What will happen when QE2 ends in June?


SUNNY DAYS AHEAD


5 reasons to buy solar stocks in 2011

PRECIOUS ETFS


Top 10 best gold and silver ETF funds

1 thought on “What would happen in the event of a U.S. debt default in 2011?”

  1. I have a web site where I give investment advise on penny stocks and stocks under five dollars . I have many years of experience with these type of stocks. If theirs anyone thats interested in these type of stocks you can check out my web site by just clicking my name. I don’t know where all this absurd spending will end. what I do know is that this whole thing will not end well.

Leave a Reply

Your email address will not be published. Required fields are marked *