The U.S. risks defaulting on its loans as it runs out of cash
The US government is at risk of defaulting on its debts (being unable to pay its bills), possibly impacting millions of Americans and sending the market into chaos.
What’s the big deal? The US relies on debt to fund government spending and its borrowing binge has led to a $28.4T debt load.
After a surge in government spending during COVID, in recent months, the US reached its borrowing limit.
- Before it can borrow more, the US government has to pass a bill that raises or suspends the debt ceiling.
- Where are we with this? At a standstill. Both political parties are failing to agree on the debt limit.
According to US Treasury Secretary, Janet Yellen, raising the ceiling is “necessary to avoid a catastrophic event for our economy”. The US treasury gave Oct. 18 as an approximate deadline for the government to pay all its bills.
The worst-case scenario: Lawmakers fail to reach an agreement — leading to the first-ever US debt default. This would be devastating for the market and the US would fail to pay for:
- Social security payments to 15M seniors.
- Postal and federal workers’ salaries.
- Public health funding, veteran benefits and more.
Moody’s Analytics estimate 6M jobs could be lost and the stock market could lose a third of its value.
We’ve been here before: In the past decade, the US had a debt ceiling crisis twice (2011 and 2013) — and in both cases:
- Lawmakers were able to reach a deal to raise the debt limit or suspend it.
- The markets saw a period of higher volatility, with the S&P 500 falling before recovering in the following months.
The S&P 500 is down over 5% since September and until lawmakers reach a compromise, markets could be in for a wild start to October.