Home > 2011 > Personal Finance > Though A Deal on the Debt Ceiling is Close, the Stakes Are High

Though A Deal on the Debt Ceiling is Close, the Stakes Are High

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The Obama administration is reportedly working with House Speaker John Boehner to close on a budget deal intended to ward off a debt default. What would a debt default mean for everyday Americans? I’ve listed out five scenarios below. Can somebody say double-dip recession?

1. Higher Taxes

In order to pay down its $14.3 trillion balance, the government would either need to cut spending in some programs and/or raise taxes (according to The New York Times the budget plan under consideration would do both). Consider this: Tax collections are at their lowest level in about 50 years, according to a report earlier this year in USA Today.

2. Public Sector Layoffs

Just like corporations downsize when struggling with cash flow, the U.S. government would probably eliminate federal employees from its payroll, in the event of a debt default. In addition to raising taxes, Uncle Sam would need to reduce spending. This would likely amount to cuts on federal salaries and public sector job creation.

[Related article: U.S. Maxes Out Its Credit]

3.  Slower Government Response

If the country enters default and public employees are laid off, one can only expect longer waits at the Post Office and unemployment lines, as well as delays in receiving Social Security checks and tax refunds. Patience will be a must!

4. Higher Interest Rates

Mortgages, car loans and student loans would likely be more expensive for the borrower, as banks will be forced to raise interest rates if the debt ceiling does not get raised in accordance with President Obama and Congressional leaders’ plans. Basically, if the government defaults on its debt, investors (including pension funds, mutual funds and foreign countries) will require higher interest rates on certain government-issued securities like Treasury bonds. And since interest rates in the Treasury market tend to dictate the movement of interest rates elsewhere, consumers could expect to see loan products begin to carry higher rates.  You can say bye-bye to 4.5% 30-year fixed!

5. Higher Prices

Another ripple effect would be inflation, higher prices for food, gas and other commodities. That’s because as the cost to borrow rises, businesses pass on their higher expenses to consumers in the form of more expensive good and services.

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Image: Stephen Yeargin, via Flickr.com

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