Hilarey is an associate editorial director for The Balance and has held full-time and freelance roles at a variety of financial media companies including realtor. The White House. Department of the Treasury. National Credit Union Administration. Accessed Oct. Council on Foreign Relations. Brookings Papers on Economic Activity. The Council on Foreign Relations. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.
Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. For instance, when a person can't make a payment on a mortgage or a car loan. When a country does this, it's known as a sovereign default.
This is when the country cannot repay its debt, which typically takes the form of bonds. So if the US were to default, it would essentially stop paying the money it owed US Treasury bond holders.
A quick refresher: the US government spends more money than it collects in taxes. So to make up the shortfall, it raises funds by asking investors to buy US Treasury bonds. Investors, such as the Chinese government and pension funds, do this because these bonds are seen as a safe place to invest money. No one really knows exactly what would happen, but the likelihood is that markets around the world would plunge and global interest rates would rise.
This is because if the US government could not repay the money it owed bondholders, the value of the bonds would decrease. Investors such as pension funds and banks holding U. Tens of millions of Americans and thousands of companies that depend on government support could suffer.
The U. The combination of all this would make it a lot harder for the U. Sign up for our weekly newsletter. It turns out the Fed has a playbook for this because Congress has come close to a default before. On Oct. Economist William English , a senior Fed adviser at the time, was briefing them. Translation: The Fed could buy defaulted Treasuries — U. The Fed, however, is supposed to be politically independent.
Other pages in its default playbook include letting banks use defaulted Treasury bonds as collateral for short-term loans. The idea is to keep financial markets calm, according to Columbia law professor Kathryn Judge.
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