A couple weeks ago, TIME Moneyland ran a piece about what could happen to regular Americans if the U.S. government defaults. At the time, most of us here thought an actual default was unlikely and that Congress and President Obama would find some solution to raise the debt ceiling. But with the Senate and the House still unable to reach an agreement, default doesn’t seem quite so implausible any more — so we thought we’d check in on and update our predictions.
In the previous post, we identified five likely consequences of a default:
- Interest rates on Treasury bonds would rise
- Some government payments would be suspended
- The stock market would drop
- Mortgage rates would increase
- Job losses, possibly by the hundreds of thousands
So far, interest rates on Treasuries have remained steady, but the stock market has looked shaky in recent days, with the Dow losing about 200 points on Wednesday.
Here are a handful of other likely results of a U.S. government default, some of which may surprise you.
Credit card rates: Any interest rate hike would be reflected in credit card rates, which are often pegged to the prime rate. But don’t panic: According to The New York Times, lenders would have to give borrowers at least 45 days’ notice before they could raise the interest rate, and that rate could only be applied to new balances.
Student loan rates: Rates on private student loans are pegged to the London Interbank Offered Rate, which is also influenced by Treasury yields. So if we see a rise in Treasury interest rates, we could see a rise in student loan rates as well. For federal student loans, however, Congress would have to pass legislation to raise rates, so those costs are unlikely to rise in the near term.
A run on the banks? According to an article on Slate by Project Syndicate, with Treasuries suddenly becoming a risky investment, banks’ balance sheets would be completely out of whack. So some Americans may decide to remove their cash from financial institutions, “with long lines of people at ATMs and teller windows withdrawing as much as possible.”
Decreased exports: With the private sector in disarray, consumption and investment could decline sharply. According to Slate, “the U.S.’s ability to export would also be undermined, because foreign markets would likely be affected, and because, in any case, if export firms cannot get credit, they most likely cannot produce.”
It’s still a guessing game about what would happen. Considering this is the first time the U.S. would ever default on its payments, we can’t look to history as a guide. But considering that so much of the financial system is tied to interest rates on Treasury bonds, a default is likely to affect almost every sector of the economy.