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April 12th, 2011 3:40 am EST - By

What Would Happen if the US Defaulted on its Debt?




When discussing the nation's current debt woes ($14.2 trillion and climbing rapidly), you will occasionally run into the odd kook who will say something like:

"I think that the United States should just default".

They will then flash you a knowing grin as if to say "What is the rest of the world going to do about it if the United States decides to default?"

If you ever run into a person like this, you can be comfortable in the fact that they have absolutely no idea what they are talking about.

Thumb Down - IllustrationLet's start from the top. In the event of a default, the nation's pristine credit rating would be trashed. This would result in much higher borrowing costs for the country - surely not a surprise.

Next up - the US dollar would absolutely collapse, as confidence in the country and its currency would evaporate overnight. Some people point to a country such as Argentina as evidence that a debt default is not such a bad thing - well, the Argentine Peso isn't the world's leading reserve currency. The collapse of the US dollar would cause absolutely havoc throughout the world. You think that the US dollar has experienced a large decline over the past couple of years? Watch what happens if the United States defaults.

The collapse of the dollar would lead to a sharp increase in the cost of nearly everything, as more US dollars would be needed to pay for imports. The collapse of the dollar would lead to a massive increase in inflation. Filling your car might cost $200 or more. Goods would soar in price.

Equity markets would crash. The housing market would crash even more as credit would become nearly impossible to obtain.

US consumers would be obliterated nearly overnight. Savings would be wiped out due to rampant inflation and the collapse of the major North American market indexes as well as the real estate market.

Companies would be crushed by a US consumer that would no longer have any buying power. In addition, credit would dry up virtually overnight, which would force untold numbers of companies to shutter their doors.

Unemployment in the country would spike to obscene levels. The country's "safety net" would likely no longer exist. Social Security would likely be a distant memory - we've raided the Social Security piggy bank to fund the nation's deficits over the last number of years - where would the money for Social Security come from in the event of a default? The US government owes programs such as Social Security, etc. more than $4.6 trillion.

The IMF has approximately $200 billion available in lendable resources. Let's assume that the US hit the IMF up for a loan - this loan would come with harsh stipulations, as we've seen in other countries over the past couple of years. The United States would need to make extremely painful spending cuts, which would throw the entire nation into disarray.

A US default would have dire ramifications on our major countries throughout the world, and it would be very likely that there would be a chain reaction of sovereign debt defaults.

--

This is just a taste of what would almost certainly transpire in the event of a debt default in the United States.

Those people who think that the United States would recover quickly in the event of a default, a la Argentina, are completely delusional. There would be a painful, painful Depression (that's Depression with a capital D) that would very likely rival the "Great Depression".

Of course, maybe I'm wrong - however, I don't really feel like finding out.



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