If The US Defaulted On Its National Debt

 

     October 18 is "a red-letter day" here in the US. The national debt ceiling expires on this day. If the national debt ceiling is not raised, the US will default on its huge national debt.

    Please do not lose sleep over this possibility. It is as likely to happen as a full-scale nuclear war.

    Let us look at the economics of a default. We will start with we consumers all over the world. If we default on our house or apartment loan, it will take six months to one year to kick us out of the place where we live. If we default on our car loan, it would take 90 days before our car was seized. If we defaulted on a major credit card owing a large amount of money (say $10,000 US or more), the credit card company would sue us in court. Eventually, they would get a judgment. In a country like South Africa, such a lawsuit would be a disaster for the consumer. They could even come into your home, take furniture out on the street, and start selling it at bargain-basement prices. Nothing would be exempt. In more civilized countries they could garnish your wages within certain limits to collect the debt. They might put a lien against your house or apartment.

   When a nation defaults on its debts, it becomes more problematic. In theory, a sovereign state has certain protections from creditors. The bondholders would go to court and sue the state to collect what was owed on the bonds. Ironically US District Courts in New York City are often the venue for such legal actions. I have personal experience with such a default in the case of Argentina. It takes years for the litigation to be completed. Most bondholders agreed to a settlement of far less than what was owed on the face value of the bonds. Some hedge funds bought a small part of the distressed debt at a low price. They held out for a lot of money and got it. Argentina was blocked from borrowing in international markets until all past sovereign debts outstanding were settled.

    The US dollar is the reserve currency of the world. A default on the US debt would be a cataclysmic event. It would set off a panic in financial markets all over the world. Stock market crashes like those seen in 1929-1931 would follow. The US dollar would collapse. It would cause pandemonium in the rest of the world because no other country has a currency prepared to become the reserve currency of the world. Hundreds of thousands of US government workers would get laid off. Unemployment would rapidly rise to Great Depression levels. There would be no ability to pay unemployment benefits to those laid off. Social Security, disability, and Medicare payments would stop. Most chilling to all we normal people, our banks and credit card companies would no longer function. ATM machines would be offline. We could not even pay our bills. Imagine the social unrest that would follow. Soon our electricity and natural gas would no longer be available as power companies failed. Countries around the world would suffer a similar fate.