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Here’s what could happen if the US defaults on its debt: ‘The reality would be chaotic.’

If a debt ceiling deal is not reached in Washington, a financial catastrophe could be ahead, experts say.J. Scott Applewhite/Associated Press

It’s never happened before, so we’re in uncharted waters. But experts say that if the United States defaults on its obligations because of a failure to raise the debt ceiling, we could plunge into a financial catastrophe.

The US government has long been running at a deficit. It doesn’t collect enough taxes to pay its bills and needs to borrow to make up the difference by selling Treasury securities to investors worldwide. The debt ceiling limits the amount that the United States can borrow. The ceiling, currently at $31.4 trillion, is a restriction imposed by Congress.

Now US Treasury Secretary Janet Yellen is warning that the government could hit that ceiling and be unable to pay its bills as soon as next Thursday, June 1. Unless the debt limit is raised.


Suspense is building because Republicans, who hold the majority in the House of Representatives, are asking for concessions from the White House in exchange for raising the debt ceiling. The talks are going down to the wire — just days ahead of Yellen’s deadline.

A default “would likely have catastrophic repercussions in the United States and in markets across the globe,” the Treasury Department has warned.

Many people believe it’s all political theater and the potential Armageddon just won’t happen. The stock market has been relatively calm in recent days. But some unimaginable things have happened in recent years (a worldwide pandemic, for example). What if this is another one of those events?’

Here are some of the impacts a default would have, according to experts:

Popular government programs — and the people they pay — would be at risk

When the money runs out, the United States would quickly default on payments to Americans through key government programs, according to an analysis last week by the Bipartisan Policy Center, a think tank.


Social Security and Medicare, among others, would be affected.

“Realistically, on a day-to-day basis, fulfilling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, military active duty pay) would quickly become impossible,” the analysis said. “The reality would inevitably be chaotic.”

Yellen has said that federal government payments to millions of families would “likely go unpaid.” Disruptions to government operations also would impact “air traffic control and law enforcement, border security and national defense, and food safety,” she said, AP reported.

The government would likely issue checks on a delayed basis, said Justin Wolfers, a professor of economics and public policy at the University of Michigan, and it would “fall further and further and further behind.”

While the situation might sound like a government shutdown, a different kind of crisis that periodically arises in Washington, it would actually be much worse, the Globe reported earlier this month.

The US credit rating would be harmed

Experts warn that if the United States decides not to pay investors, its reputation for safe securities would be in jeopardy. And the interest rates the Treasury would be forced to offer to those buying the debt would go up.

Mark Zandi, chief economist for Moody’s Analytics, told PBS NewsHour that not paying would be a “complete, utter fiasco.” Zandi and other experts believe that the government will likely continue to pay its debt obligations.

But even if investors are paid, he said, “They’re going to say, ‘Hey, look, they’re willing to breach this go-round. What about next time and the time after the time after that? You, the taxpayer, have to pay me more, in higher interest, to compensate for that risk.’”


In 2011, simply getting perilously close to breaching the debt limit led Standard & Poor’s to downgrade the government’s AAA credit rating, leading to higher government borrowing costs. This week, one of the other major credit rating companies, Fitch Ratings, warned that it likely would issue a downgrade if the limit isn’t raised.

The higher interest rates would be a heavy burden when the government needs to raise more money in the future, experts said.

“If you owe someone $30 trillion, would you rather pay them a low interest rate or a high interest rate?” said Wolfers.

A rise in Treasury rates would in turn also lead to higher mortgage rates, credit card rates, and car loan rates, stressing the finances of average Americans, experts say.

The stock market — and people’s retirement accounts — would plummet

Experts say the financial markets would be thrown into chaos if the debt ceiling isn’t extended, dealing another body blow to Americans, who would watch their retirement accounts shrink.

Wolfers said it was “extremely likely” the stock markets would fall.

Darrell Duffie, a professor of finance at the Stanford University Graduate School of Business, said he could see two possible scenarios: Investors in the stock market could pull out of stocks and invest in Treasuries as a safe haven or investors could decide to sell investments, including Treasuries, for cash, sending prices “gyrating all over the place.”


Neither would be good for those watching their 401Ks. Experts say trillions of dollars in household wealth could disappear. “I don’t see a good scenario for the stock market” in case of default, he said.

The economy would take a massive hit

Zandi and two colleagues at Moody’s have concluded that even if the debt limit were breached for no more than a week, the US economy would weaken so much, so fast, as to wipe out roughly 1.5 million jobs.

And if a government default were to last much longer — well into the summer — the consequences would be far more dire, Zandi and his colleagues found in their analysis: US economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current 3.4 percent to 8 percent and a stock-market plunge would erase $10 trillion in household wealth, AP reported.

“It’s a mess, progressively worse mess, as the hours and days go by,” Zandi told PBS NewsHour. “The damage would start to accumulate fairly quickly. Within a few days, I think it’d be so significant that, given how weak the economy already is coming into this, we would be in recession.”

Wolfers emphasized that since it’s never happened before no one really knows exactly what will happen. But he said, “We do know it’s harmful and not helpful. ... There is nothing good coming out of this.”


He said it was possible that the impact would not be a “fast explosion,” but would rather be a “slow burn that could cause a delayed but even worse problem.”

“Countries that have done this in the past have subsequently had very deep recessions and possibly depressions,” he noted.

Jim Puzzanghera of the Globe staff contributed to this report. Material from Globe wire services and major media outlets was used.

Martin Finucane can be reached at martin.finucane@globe.com.