Skip to main content

How bad would a U.S. default be?

By Mark A. Patterson, Special to CNN
October 11, 2013 -- Updated 1404 GMT (2204 HKT)
The Statue of Liberty looms over visitors below on Liberty Island in New York Harbor on Sunday, October 13. The statue was closed to the public by the federal government's partial shutdown that began October 1, but reopened Sunday after the state of New York agreed to shoulder the costs of running the site during the shutdown. Many government services and agencies remain completely or partially closed. The Statue of Liberty looms over visitors below on Liberty Island in New York Harbor on Sunday, October 13. The statue was closed to the public by the federal government's partial shutdown that began October 1, but reopened Sunday after the state of New York agreed to shoulder the costs of running the site during the shutdown. Many government services and agencies remain completely or partially closed.
HIDE CAPTION
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
Government shutdown: Sorry, we're closed
<<
<
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
>
>>
STORY HIGHLIGHTS
  • In six days, the United States government's borrowing authority will be exhausted
  • Mark Patterson: A U.S. default could set in motion a financial crisis of global scale
  • He says "default deniers" in the GOP are overlooking serious risks and problems
  • Patterson: Default would have ripple effect on stock market, businesses and economy

Editor's note: Mark A. Patterson is a senior fellow at the Center for American Progress, a liberal think tank based in Washington. He was chief of staff at the Treasury Department from 2009 to May 2013.

(CNN) -- In six days, the United States government's borrowing authority will be exhausted.

If Congress does not act to extend the debt limit, the Treasury Department will be left with only its cash on hand -- estimated to be about $30 billion -- and whatever revenues it takes in each day.

Because the government is running a deficit, available cash will be insufficient to cover the millions of payments the Treasury makes each day -- to men and women in our armed forces, veterans, Social Security and Medicare beneficiaries, federal employees and retirees, businesses that provide goods and services to the nation, and many others.

Mark A. Patterson
Mark A. Patterson

Even if Congress opts to pass a temporary extension, the threat of default will hang over the economy until a longer-term solution is adopted.

What does this really mean for the economy, and what does it mean for you?

Congress has never in our history failed to extend the debt limit, so no one knows for sure what would happen if, as some Republicans are now advocating, we tried to operate the government with insufficient funds and no ability to borrow.

It has long been the view of economists, business leaders and the Treasury Department that such a scenario could set in motion a financial crisis. Presidents and secretaries of the Treasury of both parties have urged Congress never to take that risk.

Ronald Reagan himself once said, "Unfortunately, Congress consistently brings the government to the edge of default before facing its responsibility. This brinkmanship threatens the holders of government bonds and those who rely on Social Security and veterans benefits. Interest rates would skyrocket, instability would occur in financial markets, and the federal deficit would soar. The United States has a special responsibility to itself and the world to meet its obligations. It means we have a well-earned reputation for reliability and credibility, two things that set us apart from much of the world."

Reagan's view is widely held, but some Republicans -- dubbed "default deniers" -- now argue that the debt limit deadline can be ignored without serious harm. They have urged the President to continue paying interest on the national debt using available cash and then avoid or delay paying other obligations.

Deloitte CEO: Crisis 'catastrophic'
Markets frustrated by shutdown woes

Although it's not possible to disprove either theory, the default deniers overlook an important problem: Paying interest on the debt would not protect the Treasury against what's called "rollover risk." That's the risk that investors would decide, amid the crisis atmosphere generated by a failure to raise the debt limit, to cash out their maturing Treasury bonds instead of reinvesting (or "rolling over") their proceeds into new Treasuries, as they usually do.

This would be reminiscent of the famous bank scene at the end of "It's a Wonderful Life," only on a huge and frightening scale. About $100 billion in Treasury securities mature each week, so if investors decided to put their money elsewhere, Treasury's available cash would be nowhere near enough to cash those jittery investors out.

In those circumstances, the U.S. would default on both principal and interest payments, and the economic consequences would be swift and severe.

To the extent that we were able to continue borrowing, investors would demand higher interest rates on Treasuries. (These rates have already begun to rise as the impasse in Washington has worsened.) Since Treasury rates are benchmarks for other lending, loans for homes, cars and other needs would become more expensive, and it would become harder to qualify to borrow. Consumer and business confidence would suffer.

As in the last financial crisis, falling confidence would have ripple effects, affecting other markets including the short-term lending used by companies to finance themselves. This would all dampen economic growth, which is still not as strong as we would like in the wake of the last crisis.

The stock market would weaken, and retirement savings would dip. And of course unemployment would rise. Meanwhile, the inability to pay the rest of the government's regular obligations in full or on time would be spreading its own hardship across the economy.

There is no way to know how bad these conditions would get or how far the financial contagion would spread, but it seems safe to say that no good could come from tempting such a fate. The question is: Why in the world would we ever choose to take that risk?

Follow @CNNOpinion on Twitter.

Join us at Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Mark A. Patterson.

ADVERTISEMENT
Part of complete coverage on
July 13, 2014 -- Updated 1245 GMT (2045 HKT)
To prevent war with North Korea over a comedy, what would Dennis Rodman say to Kim Jong Un? Movie critic Gene Seymour weighs in.
July 11, 2014 -- Updated 1315 GMT (2115 HKT)
Michael Werz says in light of the spying cases, U.S. is seen as a paranoid society that can't tell friends from foes.
July 11, 2014 -- Updated 1317 GMT (2117 HKT)
Eric Liu explains why in his new book, he calls himself "Chinese American" -- without a hyphen.
July 11, 2014 -- Updated 1512 GMT (2312 HKT)
John Bare says hands-on learning can make a difference in motivating students to acquire STEM skills.
July 11, 2014 -- Updated 1320 GMT (2120 HKT)
Karl Alexander and Linda Olson find blacks and whites live in urban poverty with similar backgrounds, but white privilege wins out as they grow older.
July 10, 2014 -- Updated 1620 GMT (0020 HKT)
Frida Ghitis says a poll of 14 Muslim-majority nations show people are increasingly opposed to extremism.
July 10, 2014 -- Updated 1828 GMT (0228 HKT)
Ruben Navarrette says spending more on immigation enforcement isn't going to stop the flow of people seeking refuge in the U.S.
July 10, 2014 -- Updated 2048 GMT (0448 HKT)
Faisal Gill had top security clearance and worked for the Department of Homeland Security. That's why it was a complete shock to learn the NSA had him under surveillance.
July 10, 2014 -- Updated 1841 GMT (0241 HKT)
Kevin Sabet says the scientific verdict is that marijuana can be dangerous, and Colorado should be a warning to states contemplating legalizing pot.
July 9, 2014 -- Updated 2047 GMT (0447 HKT)
World War I ushered in an era of chemical weapons use that inflicted agonizing injury and death. Its lethal legacy lingers into conflicts today, Paul Schulte says
July 10, 2014 -- Updated 1137 GMT (1937 HKT)
Tom Foley and Ben Zimmer say Detroit's recent bankruptcy draws attention to a festering problem in America -- cities big and small are failing to keep up with change.
July 10, 2014 -- Updated 1201 GMT (2001 HKT)
Mel Robbins says many people think there's "something suspicious" about Leanna Harris. But there are other interpretations of her behavior
July 9, 2014 -- Updated 1753 GMT (0153 HKT)
Amy Bass says Germany's rout of Brazil on its home turf was brutal, but in defeat the Brazilian fans' respect for the victors showed why soccer is called 'the beautiful game'
July 9, 2014 -- Updated 2107 GMT (0507 HKT)
Aaron Carroll explains how vaccines can prevent illnesses like measles, which are on the rise
July 9, 2014 -- Updated 0008 GMT (0808 HKT)
Aaron Miller says if you think the ongoing escalation between Israel and Hamas over Gaza will force a moment of truth, better think again
July 8, 2014 -- Updated 1903 GMT (0303 HKT)
Norman Matloff says a secret wage theft pact between Google, Apple and others highlights ethics problems in Silicon Valley.
July 8, 2014 -- Updated 2237 GMT (0637 HKT)
The mother of murdered Palestinian teenager Mohammed Abu Khder cries as she meets Palestinian president Mahmoud Abbas in Ramallah, West Bank on July 7, 2014.
Naseem Tuffaha says the killing of Israeli teenagers has rightly brought the world's condemnation, but Palestinian victims like his cousin's slain son have been largely reduced to faceless, nameless statistics.
ADVERTISEMENT