Question

Is it possible for the US to default on its debt in the future? Explain

Answer 1

The U.S. federal debt has reached the threshold of $21 trillion, and continues to rise. Experts agree that current spending rates are not sustainable, and we may be moving into a new financial crisis. Countries like Ecuador, Argentina, Venezuela and Greece have in recent times defaulted on their debts. That decision plunged Argentina into a time of uncertainty before the debt restructuring was successful. Countries such as Russia, Spain, and Germany have in the past defaulted on their debt and recovered with success. The effects of defaulting vary from one country to another. Inflation and high unemployment affected countries such as Greece and Argentina

The Second Liberty Bond Act introduced an early version of the debt ceiling in 1933. The debt ceiling is supposed to place a cap on how much the government will borrow. The debt ceiling will only be reached at Congress.During the last 10 years, the debt ceiling has been increased 10 times, including four times in 2008 and 2009. On March 1, 2019, a new limit will be set. The proposed ceiling will suit the federal debt level as of March 1.

If the debt ceiling is not increased, potentially the US will run out of money to pay back loans. Nonetheless, before defaulting, there are other choices which the government should explore. Government agencies may continue to operate by borrowing money from pension funds other than the Social Security and Medicare funds. In this scenario, the Federal Reserve Bank also has some funds to be used. The proceeds will be taken from sources such as taxes. In addition , the U.S. Treasury may postpone payments and issue notes with different terms.

A tax hike is likely to occur in the near future because the government will have to find new revenue sources, and existing debt rates make the government unreactive in the event of an emergency because there is not much room to raise additional funds, for example to respond to a natural disaster. When the chances of a new financial crisis increase, investors are more likely to lose confidence in the US. The willingness of the treasury to honor the issued bonds and may search for alternatives.