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What Will Happen If The US Defaults On Its Loans


NewLettersIf Congress fails to increase the borrowing of the U.S. government — in effect, telling its creditors that it will not pay back on loans that it has already borrowed — the effects could be rapid and drastic.

But what will happen if the US defaults on its loans? Here is a look at what goes on in the next few weeks if Congress does not vote to increase the debt ceiling (via Reuters).

On OCT. 17

The U.S. Treasury Department is not able to add to the debt. The government gets $6.75 billion in taxes — but pays out $10.9 billion in Social Security retirement checks. By the end of the day, the government begins losing billions more.

OCT. 24- OCT. 29

Oct. 24 is a day of reckoning: Reuters writes that “Treasury pays $1.8 billion to defense contractors, $2.2 billion to doctors and hospitals that treat elderly patients through the Medicare program, and $11.1 billion in Social Security, while taking in only $9.6 billion in taxes and other income.”

On top of that, the bond market may begin to falter and trust erodes.

Investors can cash out about $100 billion worth of U.S. debt every week but many instead choose to reinvest it. Reuters notes that “if fear of default causes investors to steer clear of new debt offerings, Treasury’s finances could unravel almost overnight.”

On OCT. 30

The day default happens, the government will be $7 billion short of cash needed to pay its bill.

From Reuters: “That would mean delays for everybody: the local schools that are owed $680 million, welfare recipients owed $553 million and defense contractors owed $972 million.”

Some companies that count the government as a major customer would take a big hit. “If you’re Lockheed Martin … it’s a big deal,” said R. Bruce Josten, the U.S. Chamber of Commerce’s top lobbyist.

On OCT. 31

Because U.S. Treasury bills are the foundation of the financial system in the world, any missed payment could break that structure — which could do tremendous damage to the economy. Borrowing costs could rise, stock markets could crash as consumers hold off on spending, and another economic disaster could begin all over again.

For more details, read the full Reuters story here.

Article printed from InvestorPlace Media,

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