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What Happens if the United States of America Defaults on its Debts (aka Treasury Bills)

A default by the United States government on its debt would be a major event with far-reaching consequences. The full impact of such a default is difficult to predict, but it would likely have a significant negative impact on the US economy and the global economy.

Some of the potential consequences of a US debt default include:

  • A decline in the value of the US dollar. The US dollar is the world’s reserve currency, and it is used in many international transactions. If the US were to default on its debts, it would likely lead to a decline in the value of the dollar, making it more expensive for US companies to do business overseas.
  • Higher interest rates for businesses and consumers. When the US government defaults on its debts, it signals to investors that the US government is not a reliable borrower. This can lead to higher interest rates for businesses and consumers as investors demand a higher return on their investments to compensate for the risk — think higher interest rates on your mortgages.
  • A decrease in investment in the US economy. A default by the US government would likely lead to a decrease in investment in the US economy. Investors would be less likely to invest in the US if they are concerned about the government’s ability to repay its debts.
  • A loss of confidence in the US government. A default by the US government would likely lead to a loss of confidence in the US government. This could make it more difficult for the government to borrow money in the future, and it could also lead to political instability.
  • A global recession. A default by the US government would likely have a negative impact on the global economy. The US is the world’s largest economy and is a major trading partner with many other countries. A default by the US government could lead to a global recession, as businesses and consumers around the world cut back on spending.

It is important to note that a US debt default is not inevitable. The US government is aware of the risks associated with defaulting on its debts, and it is taking steps to avoid them. However, the future of the US debt is uncertain, and it is possible that the US could default on its debts in the future.

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To guarantee or not guarantee

I have recently been involved in the process of refinancing a family farm. After speaking with several banks, our family LLC settled upon our perceived best bank fit to provide the needed funding. 

In the application stage, the bank requested that all the owners guarantee the loan. The bank claimed this is their standard practice until there is a history of gross revenues in the $4 to $5 million range — our small family farm’s revenue is orders of magnitude smaller. Not all banks operate this way, but financing options are limited in a small farming community in a sparsely populated state. So rather than seeking alternatives that would likely yield the exact same requirement, I decided to educate myself on what it means to guarantee a loan.

With seeding from Bard and chatGPT, I prepared the following primer on what it means to guarantee a loan.

As a loan guarantor, you agree to be responsible for the loan if the borrower defaults on their payments. In our case, the borrower is a family-owned LLC. If the LLC cannot pay the loan payments or otherwise defaults on the loan, the lender may come to you to pay the missed payment or possibly the outstanding loan amount. 

Each person guarantees the outstanding principal amount rather than a pro-rata or other determined fraction of the loan.  

The consequences of being a guarantor can vary depending on the loan agreement and the specific circumstances, but here are some potential future effects:

Financial Obligation: The primary consequence of being a guarantor is that you are legally obligated to repay the loan if the borrower defaults. So, if the borrower cannot make payments, you will be responsible for repaying the loan in full. If you do not repay the loan, it could negatively impact your credit score, and you may be subject to legal action by the lender.

Affect your Credit Score: Being a guarantor could affect your credit score. If the borrower defaults on the loan and you cannot repay it, it could negatively impact your credit score. If the borrower misses a payment, it will appear on both the borrower’s and the guarantor’s credit reports.

Difficulty Obtaining Future Credit: Being a guarantor could make it more difficult for you to obtain credit in the future. When you apply for credit, lenders will check your credit report and see that you are a guarantor for a loan. The Guarantee could make them hesitant to lend to you because they may see you as a higher-risk borrower.

Legal Action: If the borrower defaults on the loan and you cannot repay it, the lender may take legal action against you to recover the debt. This legal action could result in a court judgment against you, which could negatively impact your credit score and make it even more difficult to obtain credit in the future.

In practice, guaranteeing and co-signing a loan are used interchangeably but have differences. Guaranteeing or co-signing a loan tells the lender that you will be responsible for paying the loan if the primary borrower cannot or does not make payments. Either guaranteeing or co-signing means that if the borrower defaults, the lender can come after you for the outstanding balance.

The critical difference between the two is that a co-signer is typically a joint applicant for the loan, might have access to the loan proceeds, and has equal responsibility for making payments. In slight contrast, a guarantor may not have any rights to the loan proceeds and is only responsible for paying the loan in the event of default. Regardless of the terminology, it’s essential to understand the risks and responsibilities involved before agreeing to take on this kind of financial obligation.

Many websites provide reliable information on the risks of guaranteeing a loan. Some of the most reliable sources include:

    Federal Trade Commission (FTC) – The FTC is a government agency that provides information on various topics, including consumer protection and finance. They offer information on co-signing loans and the risks involved.

    Consumer Financial Protection Bureau (CFPB) – The CFPB is another government agency providing consumer financial protection information. They have resources on co-signing and co-borrowing, as well as the risks and responsibilities involved.

    Bankrate – Bankrate is a financial website that offers a range of resources on loans, credit, and personal finance. They have articles on co-signing and co-borrowing that provide information on the risks involved.

    NerdWallet – NerdWallet is another financial website that offers resources on loans and credit. They have articles on co-signing that explain the risks and alternatives.

    The Balance – The Balance is a personal finance website that provides information on various topics, including loans and credit. They have articles on co-signing that explain the risks and responsibilities involved.

While these websites provide reliable information, consulting with a financial advisor or attorney before guaranteeing a loan is always a good idea. Overall, being a loan guarantor can have significant economic and credit consequences. It is essential to carefully consider the risks before agreeing to be a guarantor and to make sure you fully understand the terms of the loan agreement. The Guarantee signed with the loan provider will define the specific terms. 

In practice, in the event of a borrower default, the bank will generally go after a single or ‘best’ subset of guarantors with the highest probability of paying back the loan while minimizing collection costs to the bank. The bank’s actions may leave the unfortunate situation where one or a few guarantors that have repaid the loan from personal assets may need to collect those amounts from either the LLC or other guarantors. ☹️ 

Why should you agree to guarantee a loan?  

There are a few reasons why you might agree to guarantee a loan.

  • To help out a friend or family member. If you have a close relationship with the borrower, you can guarantee their loan as a way of helping them out. Your Guarantee could be significant if the borrower struggles to qualify for a loan independently.
  • To improve the terms of the loan. Sometimes, a lender may be willing to offer a better interest rate or other more favorable terms if the loan is guaranteed. More favorable terms are because the lender has less risk of losing money if the borrower defaults.
  • To secure a business deal. If you are involved in a business deal, the other party may require you to guarantee the loan. In this case, the Guarantee might be because the lender wants to ensure the deal goes through even if one of the parties defaults.

It is essential to weigh the pros and cons carefully before agreeing to guarantee a loan. If you decide to guarantee a loan, ensure that you understand the terms of the agreement and are prepared to repay the loan if the borrower defaults.

Here are some things to consider before agreeing to guarantee a loan:

  • Your financial situation. Can you afford to repay the loan if the borrower defaults?
  • Your relationship with the borrower. Are you confident that the borrower will be able to repay the loan?
  • The terms of the loan. Ensure you understand the interest rate, repayment terms, and other loan terms.
  • Your legal rights. Get legal advice to understand your rights and responsibilities if you guarantee a loan.

Ultimately, the decision of whether or not to guarantee a loan is a personal one. There is no right or wrong answer, and the best decision for you will depend on your individual circumstances.

A grim possibility…

The United States of America is approaching a precipice predicted to arrive in mid-2023 — a possible default on US Obligations. 

“On December 16, 2021, lawmakers raised the debt limit by $2.5 trillion to a total of $31.4 trillion (Congressional Budget Office),” where the limit is currently set.

As of this writing in early April 2023, the impasse to raise the Federal Debt and the Statutory Limit (“Debt Ceiling”) between the President of the United States, Joe Biden (“President Biden”), and the Speaker of the House of Representatives, Kevin McCarthy (“Speaker McCarthy”), has kept the Treasury Department from fully meeting its obligations and at-risk of default should projections for tax collection or other assumptions not meet assumed levels. 

“On January 19, 2023, that limit [$31.4 trillion] was reached, and the Treasury announced a ‘debt issuance suspension period’ during which, under current law, it can take well-established `extraordinary measures` to borrow additional funds without breaching the debt ceiling (Congressional Budget Office).”

Please see here for a primer on the differences between debt and deficit by the Center on Budget and Policy Priorities. 

In the current rhetoric, President Biden published his budget that revealed his priorities for the country. He further requested Speaker McCarthy share the GOP’s version of a budget. President Biden has stated that he is willing to negotiate a budget with Speaker McCarthy. However, Speaker McCarthy has yet to produce an alternative to President Biden’s proposal. Further, Speaker McCarthy is demanding federal government spending cuts plus other items before the House GOP would possibly agree to increase the Debt Ceiling.  

It is common practice to increase the Debt Ceiling to accommodate additional debt to fund prior authorizations of Congress. President Biden has further asserted that he will negotiate the budget for the next fiscal year but will not negotiate over raising the Debt Ceiling.  

The House Freedom Caucus has proposed a budget. A tweet and a single-page PDF stretch the definition of a budget. So far, that is about all the information the Republican Party has shared. Speaker McCarthy has indicated that the House majority budget proposal will be later than the April deadline.

All the while time passes, the Treasury Department’s “extraordinary measures” continue to avoid default. As the USA travels toward ruin, each side seems to entrench its positions, and the middle ground is not being negotiated.  

With the above as the current state of politics, I have a dire vision of possible events that will doom the USA’s economy. These are not a roadmap but a chain of possible events looming on the horizon:

  •  Speaker McCarthy will need help creating a responsible budget proposal as the lawmakers have agreed not to cut Medicare, Social Security, and other third-rail programs or raise taxes. A feat some claim is not possible.  
  •  Speaker McCarthy will hold fast to demands to cut to already approved spending (conflating issues of debt and deficit)
  •  Speaker McCarthy and his party refuse to increase Debt Ceiling Authorization.
  • President Biden will refuse to negotiate over an increase to the Debt Ceiling Authorization.
  • A member of the House of Representatives will make a motion to vacate the Speaker at the most critical time for Debt Ceiling Authorization negotiations.  
  • As time passes, most House members may or may not vote to remove the Speaker. By this point, the Treasury Department’s ‘extraordinary measures’ limits will reach a breaking point.
  • While the Speaker’s office is unoccupied, the House can conduct no business.
  • While the House debates and votes, the USA defaults on its debts.

Albeit a dire prediction, the events are possible given the polarized political environment — many being the probable or likely outcome. This scenario is entirely avoidable and, I hope, outlandish.  

See you this summer. Please prove me wrong.

Well said…

“The end we seek is a society at peace with itself, a society that can live with its conscience. And that will be a day not of the white man, not of the black man. That will be the day of man as man.”

Thank you to Dr. Martin Luther King

The Foxy Army

Foxy was a 15-pound Boston Terrier with a personality as big as her army of friends. Everywhere she went, she made new furry friends – bunnies and squirrels alike. They would follow her around as if she were their queen, and Foxy relished in the attention.

One day, Foxy stumbled upon a group of bunnies nibbling on some carrots in a nearby meadow. She approached them slowly, wagging her tail and barking softly to let them know she meant no harm. To her surprise, the bunnies didn’t run away. Instead, they hopped over to her and nuzzled their noses against her fur.

From that moment on, Foxy had a new group of friends. The bunnies would follow her on her daily walks, and sometimes, they would even curl up with her for a nap in the sun. Foxy loved their soft, warm bodies and would snuggle up with them, basking in the affection.

But it wasn’t just the bunnies who loved Foxy. Soon, the squirrels in the nearby trees took notice of her friendly demeanor, and they too began to join her entourage. They would play games with her, scampering around her legs and up and down the trees. Foxy would bark with delight and chase after them, never quite catching them, but always having a great time.

As the days went by, Foxy’s army of friends grew larger and larger. Her owner would watch in amazement as Foxy would lead a group of bunnies and squirrels around the yard. She even caught sight of a few birds joining in the fun, perched on Foxy’s back or flying alongside her as she ran.

Foxy had become the leader of a motley crew of animals, all brought together by her friendly spirit and kind heart. Her owner couldn’t help but smile as she watched the little Boston Terrier and her massive army of bunnies and squirrels play together in the sun.

Thank you to ChatGPT for the story using my seed.