The U.S. is days away from not being able to pay its bills. Ever since the U.S. hit the debt ceiling (aka, the total amount of federal debt allowed to be outstanding) in January, the Treasury Department has been using what it calls “extraordinary measures” to avoid defaulting on the national debt.
Earlier this month, Treasury Secretary Janet Yellen said in a letter to Congress that the U.S. could be unable to pay its bills by as early as June 1. So as Congress inches closer to a deal to raise the debt ceiling, the default deadline looms closer and closer, too. The U.S. has never actually reached the point of defaulting on its debt before, and economists warn of dire consequences if Congress cannot reach an agreement on the ceiling. Let’s take a look at what it means for you personally if Congress doesn’t reach a debt ceiling agreement soon.
How the debt ceiling deadline will impact you
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Yellen has said the U.S. defaulting on its debts could cause “irreparable harm” to the U.S. economy. Because the U.S. has never defaulted on its debts before, so there’s no historical precedent for what exactly will happen. What is clear is that even getting this close to a breach of the U.S. debt ceiling could have some of the potential ramifications.
Social Security, Medicare, and other government obligations
One of the first areas to take a hit could be the government’s mandatory-spending programs. In this case, the Treasury Department might decide to delay or temporarily halt payments like Social Security checks, Medicare disbursements, and even payments to state and local governments. If you’re a government worker, you might not get your paycheck in full or on time.
Higher interest rates
If you’re planning on applying for a credit card, a home, or a car loan any time soon, brace yourself. Another consequence of the uncertainty and risk surrounding the debt ceiling stand-off means interest rates are climbing. This impacts everything from your mortgage, to your student loans, to your credit card.
Outside of your personal finances, higher interest rates take taxpayer money away from other much-needed federal investments, like in infrastructure and education.
A recession, and all its ripple effects
Default could trigger a recession. More specifically, Goldman Sachs economists have estimated that a breach of the debt ceiling would immediately halt about one-tenth of U.S. economic activity. That means stock prices plummet, consumer prices spike, and jobs are lost. As an individual consumer, here’s what you can do now to prepare for a recession.
The bottom line
Even short of a default, there is an enormous amount of uncertainty surrounding how this debt ceiling debacle will hurt you as an individual. For now, all you can do is focus on what you can and cannot control. During a recession, your means of increasing your income will be limited, so it’s wise to focus on cutting back on your spending. Keep building your emergency fund and be ready for ripple effects like job loss, higher inflation, and more expensive borrowing costs.