US Debt Crisis: What Happens If America Defaults?

did you know that the US has $ 35.8 trillion of debt this is more debt than any other country in the world and it continues to grow in fact if you converted that into a stack of $1 bills it would reach to the moon and back five times over naturally this has raised concerns that the US government could default on its debt so today we'll tell you everything you need to know about the growing concerns of a government debt default what the US is doing about it and what this could mean for the market let's

dig in now if you're unfamiliar with what a government default means here's a bit of context most governments around the world make money through taxes and various fees this money is supposedly used to fund infrastructure and institutions so think things like roads schools hospitals and so on although it's often used on stuff like military spending and buying votes the problem is most governments also spend way more money than they pull in and this means they have to borrow money now this is done by selling government bonds which are sort of like IUS with a bit

of Interest added on investors buy these government bonds knowing they'll get their money back at the end of the Bond's duration because a government will either print money or simply take it from its citizens and this is why bonds are generally regarded as the safest investment out there now the amount of Interest a bond holder earns depends on several things such as the Bond's duration how stable or reliable the issuing government is and the buying and selling activity of Market participants these Market participants can include anyone around the world from Individual investors to institutions and

even the Central Bank of the country in question generally speaking the longer the duration of the bond the higher the interest rate will be for Bond holders and this creates the so-called yield curve which normally goes up and to the right we say normally because sometimes yields on shorter term bonds are higher than those on longer term bonds when this inversion of the yield curve happens it basically sends a signal that something is wrong with the economy FYI the US yield curve was inverted from July 2022 all the way until September this year and was

the most inverted it's been in over 40 years despite this though the US managed to Kick the Can down the road and that was achieved through record levels of government spending and of course this spending wasn't paid for by taxes it was paid for by borrowing and this caused the US government's debt to balloon leading to concerns that someday it won't be able to pay back Bond holders especially with interest rates being so high if the government is unable to repay Bond holders with the added interest it will go into a contractual default this would

have some devastating consequences not just for the us but for the entire global economy consider that us bonds are used as collateral in The Wider Financial system and by the way if you're enjoying the video so far pound that like button to give it a boost And subscribe to the channel for good measure be sure to Ping that notification bell too so you can see more content like this so then just what would happen if the US were to go into default well the severity of the impact would depend on how long the US was

in default for but economists believe that even a brief default would cause a global economic crisis while a long-term default would be catastrophic in either case the effects would be felt almost instantly that's simply because it would cause instability in the US bond market as I noted a few moments ago us bonds are used as the primary form of collateral within the financial system so instability at that base layer would cause issues in Practical terms it would cause interest rates to spike on us bonds causing interest rates to spike on everything from mortgages credit cards

loans government bonds and everything in between this would make it much harder for businesses to operate and would force men to go bust Not only would this result in less taxable Revenue but it would also cause unemployment to Skyrocket with the potential for unemployment to rise by around 9% this equates to around 6 million jobs being lost in the United States on a global scale the failure of the US government to keep the world's largest economy in order would just about destroy the confidence of both consumers and investors this would make it much harder for

the US to grow its economy on top of this the US's credit rating would be downgraded making it even harder to Source the investment it needs to be sustainable as a result the government would be forced to heavily reduce its spending which would further damage growth there would be major cuts to critical functions like Social Security Public Services military spending infrastructure and institutional development the resulting austerity would leave many people in the US without the support they need to survive put differently a default could be a death sentence for some US citizens possibly many and

if that wasn't scary enough consider that it wouldn't just be the US that was affected things would also be felt instantly at the global level too as the saying goes if the US sneezes the rest of the world catches a cold in case it wasn't obvious enough a default would mean that us treasuries would immediately lose their credibility as a safe investment option making it harder to find overseas investors and if any Global Investors were brave enough to buy up US Treasury bonds the interest rates they would have to be compensated with would be through

the roof and to top it all off a US default would cause the stock market to crash some economists predict that the stock market could decline by as much as 45% ouch the result of this would be that the US dollar would be significantly weakened and this would likely lead to being abandoned as the world's Reserve currency hold up a second there guy sorry to interrupt folks but I just wanted to very quickly tell you about the coin Bureau deals page now this is the place where we have put together some of the very best

deals and Promos in all of crypto so you can think things like exchange signup bonuses trading fee discounts and money off of Hardware wallets and much much more besides so if you want to check that out coin.com deals is the place to go or you you can just use the link in the description of this video down below thanks very much and now back to you guy so then now that we understand just how devastating a default would be you may be wondering just How likely this is to actually happen well outside of the US

there have historically been many occasions when a country has gone into default for instance Greece defaulted in 2012 and with a debt of € 138 billion this was the largest government default ever but of course Greece isn't alone some countries such as Argentina have defaulted multiple times Spain actually holds the record for this having defaulted six times the US however has never actually defaulted on its Deb but that's not to say it hasn't come close in fact there have been multiple occasions where the US was dangerously close to hitting its debt ceiling now essentially a

debt ceiling is the limit in how much the US US government can borrow and was implemented during the first world war to encourage the government to be careful with its spending this clearly hasn't worked though because it's been raised over 100 times since then and this happened as recently as last year when the US hit its debt ceiling in January meaning it could no longer legally borrow any more money limiting it to whatever funds it already had this caused a rift between President Joe Biden and the House of Representatives which was led by a Republican

majority the tldr was that both sides knew that the limit needed to be raised but couldn't agree on how much to raise it by this caused political gridlock which put the US on a very short timer in fact treasury secretary Janet yelen said at the time that if politicians couldn't reach a consensus the US would run out of funds by early June known as the xate while politicians in Congress continued to debate the issue the treasury resorted to taking drastic measures namely by diverting funds intended for things like pensions towards funding government spending this was

all done in an effort to keep the xate as far off as possible but a blog post published by the White House in May said that the xate was rapidly approaching an agreement was finally made at the 11th Hour just days before it was too late as a result the debt ceiling has actually been suspended until the 1st of January 2025 meaning there's not technically a limit on what the US can borrow until then and you can learn more about the US hitting its debt ceiling by checking out a video we released at the time

we'll leave a link to that in the description anyway there have been growing concerns about the size of the US debt load which has been growing pretty much parabolically since the 1980s in fact the only time since the Year 1980 when the US was actually able to reduce its publicly held debt was between 19 1998 and 2001 in fact over the last 100 years the US federal debt has expanded from 394 billion to $ 35.8 trillion today almost a 100x with a US population of around 346 million this equates to an average debt of well

over $100,000 per person crazy stuff now at this point you may be wondering if there's a way that the the us could ever get out of debt well although it's a near impossible task there are some steps Uncle Sam could take the problem is every one of them is highly controversial ironically the option that's probably the most controversial would also be the most effective and that's increasing legal immigration as you can imagine not too many people would be pleased about this given the recent surge in illegal immigration the thing is that legal immigration would bring

in foreign entrepreneur URS and new taxpaying businesses to the US it would also bring in a whole wave of workers from all over the world who would go on to pay us taxes and not only that but this would also mean more people uh doing the mattress dance which in the long term creates even more workers and would massively boost the economy by driving up consumer demand assuming these people can afford to have families of course another controversial option is to raise the retirement age this would be a massive middle finger to the elderly but

it would also result in more hours of productive work overall as well as less payouts in retirement benefits alternatively the US government could Implement a national sales tax this would feel incredibly unfair because it would make the cost of living even more expensive but it would rake in money fast just think how much a government could bring in if it got say 5% of every purchase made another option the government could take is to tax foreign investments into things like the US Stock Market this approach would minimize the social and economic side effects that could

potentially arise as a result of the other methods the problem here though is that it could discourage foreign investment to the point that it starts to hurt us bonds and even the US dollar so then it goes without saying that none of these Solutions are ideal and therefore they're not very likely to happen so instead the question turns to what the US government can do to reduce the chances it would go into default well thankfully the US government does have a few options to repay its Bond holders the first option is to turn on the

money printer and use this new money to buy back this debt with the interest owed this is commonly referred to as inflating the debt away but the problem with this approach is that you get well more inflation as you'll know this devalues the currency in question because the supply has been increased but the demand has stayed the same if not reduced another option is for the Federal Reserve to cut interest rates something it did in fact recently start doing in theory this would reduce the interest on US debt which should make repaying that debt much

easier in practice though this would probably have the opposite effect that's because it would lead to protests from long-term Bond investors who would have locked their funds away for a long time only to see their profit slashed so as such the most likely solution would be more of the same the US government will likely just borrow more money which it does by raising the debt ceiling recall that this has happened more than 100 times in the past so well it's likely to keep happening this borrowed money would then be used to pay off old debtors

and thus the can gets kicked down the road once again but as we've discussed this borrowing will only create more debt that the US realistically won't be able to pay back and instead will just carry on inflating away now then at this stage you may be wondering if the US is in so much debt who's actually buying it well as it happens it's not just domestic investors buying up government bonds in fact other countries own around 30% of total US debt the countries holding the most debt outside of the US are Japan which holds over

$1.1 trillion in US debt followed by China with around $770 billion and the UK with around $710 billion what's intriguing is that Japan and China have reduced their Holdings of US debt over the last 10 years whereas countries like the UK Luxembourg and Canada have ramped up their Holdings note that there's speculation that countries like China have been buying us bonds via third countries which could explain the ramp up in bond hold Holdings from smaller Nations now broadly speaking there are two types of US debt there's public debt which is sold as bonds and treasury

bills to outside investors and intergovernmental debt which is controlled by the government and isn't tradable governments will use the latter for things like Social Security Medicare and retirement funds so why do foreign countries buy us public debt well there are several reasons the first is that it can be resold on the open Market which presents the opportunity to make a profit alternatively some countries will buy US debt simply because the dollar is the world's Reserve currency this makes bonds act as de facto bank accounts as they earn an interest rate in USD meanwhile on a

domestic level the largest holder of public US debt is the Federal Reserve the Central Bank of the US the FED purchases this debt as part of its operations to influence inflation and interest rates to control the overall Supply commercial banks will also buy up US debt as part of their reserve requirements and investment strategies other large holders include investment funds such as Mutual or Pension funds which buy up bonds because they offer long-term stable income and this is the same reason why state and local governments insurance companies and other corporations and institutions buy up US

debt too stablecoin issuers have also been buying debt but well that's a topic for another time so then how could a US debt default affect the markets well in case it wasn't already obvious the US going into default would be a global catastrophe however the reality is that it's very unlikely that this would ever happen put simply that's because regardless of who's in office the US government will print the money it needs to buy back its debt and prevent a default naturally this inflation will devalue the US dollar much like it's been doing for decades

however in the eyes of the government this this is the lesser of two evils the alternative is that the US government defaults and the US economy and the Dollar's value collapses entirely now inflation is obviously bad for an Investor's wealth however it would simultaneously be bullish for assets like gold and Bitcoin which are often used as Hedges against inflation although it should be noted that just because number goes up in fat terms this doesn't necessarily translate to actual gains being made rather the fiat currency is losing value against these assets and this gives the illusion

of profits to give a quick example to illustrate why this is consider that the average price for a house 50 years ago was around $39,000 in the United States now you might be thinking that this is super cheap however aside from a few changes in Deco and maybe a few improvements here and there the base asset is essentially the same it's still a house with roughly the same intrinsic value the reason why the house seems drastically more expensive today is actually because the US dollar has eroded in value since then heck this is a tale

as old as time and is why pretty much every fiat currency that has ever existed has been doomed to fail almost every country in the world props up its economy by inflating the money supply but it's a lot like a balloon you can only inflate it for so long before it pops at that point it's time to find a new balloon this is why it's generally agreed that the best way to hedge against inflation is to invest in appreciating assets rather than keeping your wealth in a depreciating currency so this could be physical gold which

is widely considered a safe haven asset or it could be an alternative digital gold like Bitcoin which by the way is the best performing asset of all time that way these assets are likely to climb in value which means that even if the Fiat current D values it'll be offset by real actual gains not Financial advice of course and if you want to start investing in BTC remember to check out the deals page in the description to maximize your gains ensuring that the only thing being inflated around here is your portfolio Okay folks that's just

about all for today's video if you learn something new show it by Smashing those like And subscribe buttons and ping that notification Bell to catch our next one if you know someone who'd love this sort of content then take a second to share it with them too thank you all so much for watching and we will see you next time this is Guy signing off [Music]