Could the U.S. Go into Default?

What would happen if the United States, largest economy in the world, went through a financial crisis? Greece, a much smaller economy, made the economies of the world sway unsteadily when it underwent one such crisis. This makes the prospect of a similar scenario with the United States a terrible one indeed. Whether this is a realistic scenario is certainly a subject for debate. However, the United States’ own Treasury Department is not discounting the prospects of the United States going into default.

Yesterday, Timothy Geithner, Secretary of the Treasury, sent a letter to Senate Majority Leader Harry Reid warning that the federal government could come into default on its loans if the current debt levels are not properly managed. He specified that the ceiling of debt limits will be reached from March 31 to May 16 of this year, giving a specific date for a possible crisis. He sent a stern and menacing, albeit supremely important, letter to Congress requesting the debt limits be raised in all haste.

As of the end of last year, U.S. debt has soared to $14.25 trillion, just inches under the $14.3 trillion mark. If this condition persists without any future balances, the United States would find itself in a situation of “default.” Even the emergency measures of local and state governments to put a halt on issuing bonds would have little effect and many unwanted side effects. That is why simply raising the accepted debt level is being considered the most viable solution.

Many Republican congressmen, though they state that they are not entirely excluding the possibility of a U.S. default, have decided to bring the matter of raising acceptable debt levels up only as March approaches. Instead, they are moving to pressure the administration to first reduce expenditures and bring mid- to long-term debt under control. If this standoff lasts any longer, then the specter of a default may become a reality.

In the extremely unlikely event that the United States should experience even a partial, short-term default, it would be a disaster of cataclysmic proportions for the world. The financial crisis or the current European crisis would pale in contrast to the aftershocks of such an eruption. It is hard to even fathom the years and the pain that such a recovery would entail. For the security of the world’s economy, the U.S. administration and its Congress must move at once to block the threat of default. May this become an opportunity for our own government to look closely at its own debts and prepare for the worst of scenarios.