U.S. Default Over Government Shutdown, Debt Ceiling Fight Would Kill The Dollar’s Value

The U.S. default is on the minds of everyone as the debt ceiling date looms over the 2013 government shutdown.

As previously reported by The Inquisitr, due to the government shutdown Social Security is running out money soon.

A government shutdown history shows that the Democrat-controlled Senate hasn’t passed a Federal budget in many years but the debt ceiling has kept the government spending somewhat in check. The debt ceiling is essentially an artificial barrier created in 1917 that limits the Federal government in issuing new bonds, which is the principle way the Federal government borrows money. The debt ceiling does not control or limit the ability of the federal government to run deficits or incur further debt. Rather, it is a limit on the ability to pay back obligations on debts already incurred. Because of this, if the debt ceiling is not raised and a U.S. default occurs the United States credit rating could be hurt and devalue the US dollar like what happened with Standard & Poor in 2011.

Before the 2013 government shutdown began, the U.S Treasury only had about $30 billion available to avoid a U.S. default, although the IRS continued to collect tax revenue. Based upon older projections over the debt ceiling, between October 22 and November 1, 2013 a U.S. default may start to occur.

But the U.S. default may happen as early as this Thursday, October 17. The beginning of the financial troubles will start with the Federal government not being able to make approximately $55 billion in payments for Social Security benefits, Medicare provider payments, active duty military pay, and military pensions.

University of California economist Barry Eichengreen says a U.S. default would cause the world to question the U.S. dollar’s status as the world’s reserve currency:

“Even if the Treasury paid bondholders first — choosing to stiff, say, contractors or Social Security recipients — the idea that the U.S. government always pays its bills would no longer be taken for granted. Holders of U.S. Treasury bonds would begin to think twice.”

In addition to the U.S. default causing the USD to drop in value, a drop in stocks and bonds is already being compared to the 2007 recession. The effect of the two-week government shutdown on 4th quarter United States GDP growth was projected to be 0.3 percentage points. The U.S. default could lead to a “fire sale” on securities, which would threaten the long term security of banks and other financial institutions. This would trigger a much worse recession which may even become a full economic depression.

Other governments are reacting to the threat of a U.S. default by moving away from U.S. Treasury bonds. China has already reduced its United States debt holding from 45 percent in 2010 down to 35 percent.

Businesses are preparing for a U.S. default, as well. Big companies are hoarding cash and choosing to not make certain purchases. But, overall, the heads of big business seem to think the “people in Washington are stupid but not that stupid.”

While raising the debt ceiling will become a necessity for avoiding the U.S. default the Federal deficit will have to be finally tackled by Congress for real some time in the next couple years. Overspending by over $850 billion per year is unsustainable and if the US Federal debt (which is almost $17 trillion) reaches a certain point a U.S. default almost becomes unavoidable.

How do you think Congress should end the government shutdown? Should a debt ceiling bill avoiding the U.S. default raise the debt limit without any consideration, or should tax hikes or spending cuts be included, as well?