What to Expect if the United States Defaults

The effects of a U.S. government debt default will largely depend on how soon the House of Representatives ends its fiscal brinksmanship. As the 2011 debt-ceiling standoff showed, the effects of a potential default will not wait until the Treasury deadline of October 17, and the 2008 financial crisis proved it is extremely difficult to predict what will break in the financial system until it has broken.

With that in mind, this issue brief examines two basic scenarios of a U.S. default: one in which the debt ceiling results in a default for only a short time—say, less than one business day—and one in which the United States is unable to borrow for a longer period.

In either case, a failure to lift the debt ceiling in a timely manner will result in:

• Significantly increased interest costs on the national debt
• Long-term negative impacts for the U.S. economy
• Real, tangible, and costly consequences for everyday Americans
• Severe, unpredictable consequences for the U.S. and the world financial system
• Macroeconomic consequences that increase with each day the debt ceiling restrains activity
• An immense amount of unpredictable downside risk to the U.S. economy

For more on this topic, please see:

• What Should We Expect if the United States Defaults? by Michael Madowitz