What Would Happen if the U.S. Defaulted on Its Debt (2023)

FAQs

What Would Happen if the U.S. Defaulted on Its Debt? ›

A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.

The stock market will certainly take a hit if the U.S. defaults on its debt. At moments, the losses could seem significant to anyone with investments or retirement accounts. But for those with diversified portfolios who aren't nearing retirement, investment experts advise that you stay the course.

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.

That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses. Since a debt default would likely send interest rates soaring, any credit card debt you're saddled with may soon cost you more.

The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.

There's no law saying you can't move to another country if you have debt—even if it's in collections. But if you've taken on debt in the U.S., you're contractually obligated to pay it, regardless of where you choose to live. Living abroad can make it more difficult for creditors to find you and collect on your debt.

Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.

How long does it take to recover debt in USA? ›

The statute of limitations for collecting debt payments typically ranges from three to six years, depending on the state, but in some states it's as long as 10 years.

If a debt collector has a court judgment, then it may be able to garnish your bank account or wages. Certain debts owed to the government may also result in garnishment, even without a judgment.

Once a default is recorded on your credit profile, you can't have it removed before the six years are up (unless it's an error). However, there are several things that can reduce its negative impact: Repayment. Try and pay off what you owe as soon as possible.

As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).

The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.

Generally speaking, they will hold U.S. Treasury securities as a low-risk asset. The biggest effect of a broad scale dump of US Treasuries by China would be that China would actually export fewer goods to the United States. Overall, foreign countries each make up a relatively small proportion of U.S. debt-holders.

The federal government needs to borrow money to pay its bills when its ongoing spending activities and investments cannot be funded by federal revenues alone.

Mortgage balances, the largest source of debt for most Americans, rose 5.9 percent between 2020 and 2021.

Today, a government that defaults may be widely excluded from further credit; some of its overseas assets may be seized; and it may face political pressure from its own domestic bondholders to pay back its debt. Therefore, governments rarely default on the entire value of their debt.

What country has more debt than the US? ›

Japan tops the ranking with central government debt of 221 percent of GDP, followed by Greece, Sudan, Eritrea, and Singapore. Not long ago, the U.S. was among the least indebted countries.

China's debt is nearly 44% of its GDP and its local governments owe nearly $5.14 trillion. With the economic slowdown and collapse of land sales revenue, provinces and local governments in China are facing an embarrassing situation.

Stock market crashes wipe out equity-investment values and are most harmful to those who rely on investment returns for retirement. Although the collapse of equity prices can occur over a day or a year, crashes are often followed by a recession or depression.

Debt is often cheaper than equity, and interest payments are tax-deductible. So, as the level of debt increases, returns to equity owners also increase — enhancing the company's value. If risk weren't a factor, then the more debt a business has, the greater its value would be.

When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Essentially, it has disappeared into thin air, reflecting dwindling investor interest and a decline in investor perception of the stock.

Very rarely should you sell your investments to pay off debt. The one exception here is if you have high-interest debt (like an outstanding credit card balance), but even then there are alternatives to consider before using your investments as repayment.

Unfortunately, a stock market crash is likely to result in major declines in your 401(k) account balance, at least short term. How can I avoid losing money from my 401(k)? The best way to avoid losing money in your 401(k) — especially during a recession — is to avoid selling off all your investments.

And while theoretically possible, the entire US stock market going to zero would be incredibly unlikely. It would, in fact, take a catastrophic event involving the total dissolution of the US government and economic system for this to occur.

The bottom line. The price of any stock can fall rapidly and even plummet to zero, usually when a company goes bankrupt. Whether this proves positive or negative depends on the position an investor holds. An investor in a long position can lose everything, while someone holding a short position can benefit greatly.

One guideline to determine whether you have too much debt is the 28/36 rule. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus debt service, such as credit card payments.

What company has the most debt? ›

Debt-to-income ratio targets

Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high.

"In the first half of 2023, the S&P 500 is expected to re-test the lows of 2022, but a pivot from the Federal Reserve could drive an asset recovery later in the year, pushing the S&P 500 to 4,200 by year-end," the investment bank said in a research note.

Why the stock market can be safer. Although the stock market produces volatile returns, it has a long history of outpacing inflation in the long run. So, if the money you have invested in the stock market isn't going to be used in the next few years, it's likely safer to keep your money invested than to take it out.

Prioritize paying down high-interest debt

As inflation rises, central banks have been raising interest rates to make consumers spend less. These increased rates make it more expensive to borrow money, and make existing debt even more costly. For most consumers, the biggest impact of these rate hikes is on credit cards.

Our recommendation is to prioritize paying down significant debt while making small contributions to your savings. Once you've paid off your debt, you can then more aggressively build your savings by contributing the full amount you were previously paying each month toward debt.

Investing and paying down debt are both good uses for any spare cash you might have. Investing makes sense if you can earn more on your investments than your debts are costing you in terms of interest. Paying off high-interest debt is likely to provide a better return on your money than almost any investment.