How a US Federal Government Default Could Affect You

For Treasury Secretary Janet Yellen, it was time to give a clear warning: Congress and the White House need to come to an agreement on the debt-ceiling pronto. Congress needs to approve a bill that increases the Federal Governments ability to go into further debt. Otherwise, the government will find its cash flow restricted and go into default.

Currently, there are many political forces behind the bill’s approval. The White House is pushing for an unconditional “no strings attached” debt ceiling increase. However, both the GOP and many political interest groups see this as an opportunity to steer the government into a more fiscally-responsible direction.

But How Could This Affect Everyday Citizens?

The negotiations around the debt ceiling may be happening in luxurious lounges or during televised debates. However, it will impact the lives of everyday citizens. The effects of a government default will likely have much more dramatic consequences.

But how will it be felt by your family? Here’s a quick rundown of the consequences for several sectors.

For Pensioners

One of the government’s biggest ongoing expenses is Social Security. In the event of default, 67 million people who are currently receiving Social Security benefit may see dire straits -- but the severity and length of these “lean times” are yet to be determined.

Thanks to a 1996 law, the government will be allowed to dip into the Social Security trust fund until the debt ceiling is raised again. However, this is not a sustainable solution in the long term. To play it safe, the government may choose to withhold some payments, or to issue only partial benefits for a while.

For Business Owners

A default will likely affect the U.S. Government’s credit rating. A downgrade will send interest rates on any government debt higher. The Federal interest rate is usually taken as a gage for all other interest rates -- so businesses and consumers will likely see their own costs go up.

For small businesses, this will make it harder to implement any expansion plans or gather supplies from overseas. And what’s more, once raised, interest rates are unlikely to go back down.

If You Rely on Medicare or Medicaid

...or any other social programs, such as SNAP, federal housing benefits, you may have to dip into your own emergency savings. The federal government foots many of these bills, and will be barred from using any Social Security funds to balance their books.

For Job Seekers

Finally, the default could cause larger, but less-defined issues for the economy -- essentially hitting the brakes on it. One of the easiest ways to quantify this may be in job creation. According to Moody’s, a default of just one week may boost the unemployment rate by as much as 5%. If the default lasts for six weeks, the unemployment rate may increase by a further 3%, and the economy may shrink by 4%.

How Can We Prevent This Scenario

Congress can halt these economic doomsday scenarios by passing a bill that raises the debt ceiling without delay. According to the Washington Post, barely 26% of Americans support placing any restrictions or conditions on this bill. Meanwhile, 82% of respondents reported being at least somewhat worried about the effect of a government default on the economy -- and as we have seen above, they have reason to be.

Grassroots Pulse covers public policy and political issues aimed at engaging highly-active policy makers, donors, and grassroots leaders at the forefront of the political process in America today.

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