In the fall of 2013 the U.S. came perilously close to defaulting on its debt. Already reeling from a two-week government shutdown, lawmakers were able to come together at the eleventh hour to raise the debt ceiling through February 7, 2014. If it had failed to do so, then for the first time in history the U.S. would have been unable to pay the interest on Treasury bonds. This would have sent global markets into disarray while almost certainly setting off another Great Recession.
But while much attention was paid to the broad chaotic consequences of this political squabble, less consideration was granted to those parties the government actually owes money to. Some even suggested that large stakeholders like China could afford to wait for their payday should the worst occur. However, in the event of a default the chief victims would without a doubt be the U.S. itself. While China holds a staggering $1.2 trillion in Treasury bonds, the entirety of Social Security’s $2.6 trillion war chest lies in bonds as required by law. What’s more, federal retirement and disability benefits account for more than $1 trillion worth of bonds while the Federal Reserve holds $2.1 trillion worth of them.
Private enterprises and individuals operating within the U.S. would be the next hardest hit. State and local governments own billions of dollars in bonds, as do insurance companies, private pension funds and mutual funds. An additional $1 trillion of U.S. debt belongs to individuals, brokers and various corporations. Looking globally, China may be our biggest lender but with $1.1 trillion in bonds Japan is not far behind. Other countries own approximately $2.6 trillion of American debt. With so many disparate parties dependent on earning U.S. bond interest, its no wonder why extending the debt limit was such a gigantic issue. Unfortunately, the problem is far from being solved.
Questions:
- Would the rating of U.S. bonds been lowered had the debt ceiling not been raised?
- What would be the major problem globally if the U.S. defaulted on its debt?
Source: David Kestenbaum, “What a U.S. Default Would Mean For Pensions, China and Social Security,” NPR, October 10, 2013. Photo by Quoctrang Bui.