What Happens if the U.S. Defaults?
When it comes to this question, we’ve got good news and we’ve got bad news. The bad news is that if the U.S. defaults on their debt, it would mean the worst global economic crisis we’ve seen in our lifetime. It could even be the worst economic crisis the world has ever seen, full stop.
The good news is that the chances of it happening are so incredibly small that it’s a risk that shouldn’t even be on the radar for investors.
Even so, let’s talk about what a government default actually is, and explain why it’s so highly unlikely that it will happen to the US.
If you’re worried about economic turmoil and the potential for a recession, there are steps you can take to protect, and even grow, your investments regardless. There are sectors and asset classes that hold up better than others during recessions, and some of them can even prosper.
In anticipation of a potential recession on the way, we’ve created the AI-powered Recession Resistance Kit, which uses AI to analyze and predict the performance of a wide range of recession resistant assets, automatically rebalancing every week in line with those predictions.
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What is a default?
A default is when an individual or an organization (like a government) decides not to pay their debts. If someone decides to not pay their mortgage one month, they’ve defaulted on their loan.
Governments all around the world borrow trillions of dollars through the issuance of bonds, such as U.S. Treasury bonds. It’s a normal part of the world financial system, and many governments are considered very low risk.
That’s because debt from a country like the U.S. is effectively backed by the strength of the economy. The U.S. government has the ability to raise substantial revenue through taxation of its big corporations and wealthy population.
Not only that, but they also have the ability to simply print more money, as we’ve seen happen through quantitative easing in recent years.
Why a U.S. default is highly unlikely
The U.S. government is able to borrow money at the lowest rates in the entire world, because they are considered such a low risk, and control the U.S. dollar, the world’s reserve currency.
A default would completely ruin this reputation, would send the cost of debt soaring and would hugely damage the U.S. economy, for essentially no benefit.
There’s no practical reason why the U.S. government would choose to default, when they have such economic power and control over their ability to raise funds to repay debt.
The bottom line
If the U.S. was to default on their debt, it would be a global financial disaster. But luckily, there’s almost zero chance that it will happen.
A U.S. default isn’t something investors need to worry about, but that’s not to say there aren’t some dark clouds on the horizon. It’s looking more and more likely that we’re going to see a recession, which is why our newly launched Recession Resistance Kit is well worth a look.
Download Q.ai today for access to AI-powered investment strategies.
