Can the US Default on its Debt?

The United States relies heavily on its creditworthiness to pay for programs ranging from military spending to Social Security. Should the US default on debt, it would create a question of which bills the government will pay and in what order. Because much of the trading in worldwide markets is tied closely to US Treasury certificates, a potential global downturn in the markets could ensue. A US default on debt could result in the US government receiving a downgrade in its credit rating and the devaluation of Treasury bonds held by many countries and people the world over.

Those familiar with the US debt crisis are of two minds. Many believe that the government cannot allow a US default on debt. A default would not be in the interest of government officials, who would have only themselves to blame for the potential market chaos that default may create. There are provisions in the US Constitution that require the payment of governmental debts, and failure to raise the debt ceiling and allow for such payments may not be legal under the most important legal document in the land.

Others find the possibility of the US debt crisis spiraling out of control a very real threat. Whether or not it is legal under the Constitution, if the funds aren't allocated quickly and correctly, it could have a dramatic effect on world markets. Worldwide time zones ensure that US Treasury certificates are traded at almost all hours of the day. They note that Wall Street and government officials seem very confident that an eleventh-hour compromise will appear, and this confidence could lead to the missed deadline if all parties do not move quickly enough. The government has only once defaulted on its debts before, when a compromise was reached in the 1979 budget talks, but that was due to Treasury officials not acting quickly enough to ensure debts were paid by deadline.

If a US default on debt occurs, the markets will likely feel it immediately. A precipitous drop in the value of US Treasury certificates could destabilize the world's economy. It is unlikely that the government would be completely unable to pay bills but lacking the ability to borrow to make future payments is important, especially with exceptionally large payments to Social Security looming. There is no outstanding plan for how funds may be allocated during such a crisis, and the government may have little cash on hand or incoming revenue to deal with the situation.

The possibility of a US default on debt is a serious concern for investors of all stripes. Destabilization of world markets could happen with as little as a single missed payment, and foreign governments that have invested heavily in US Treasury certificates may feel the sting exceptionally acutely. A US default on debt has the potential for causing global market devastation as well as domestic problems, making it a worst-case scenario for many investors.

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