Freezing social support
The Council of Economic Advisers (CEA) - an agency that advises the President on economic policy - has painted a grim picture of life after debt default.
Every single American could feel the impact.
“Payments from the federal government that families rely on to make ends meet would be endangered,” the CEA explains. “The basic functions of the Federal government—including maintaining national defense, national parks, and countless others—would be at risk.
“The public health system, which has enabled this country to react to a global pandemic, would be unable to adequately function.”
What does that mean for individual households?
It means that the government could delay various paychecks that help millions of Americans, such as Social Security payments, Medicare and Medicaid, and benefits to veterans.
History has a tendency of repeating itself and this does not bode well for America’s eleventh-hour debt ceiling decision … or your investments.
In 2011, Congress approved a debt ceiling extension with just hours to spare before the Treasury would default.
This close call prompted credit rating agency Standard & Poor’s to strip the U.S. of its prized AAA (outstanding) rating, removing it from its list of lowest-risk countries. The agency cited dysfunctional policymaking in Washington as a factor in the downgrade.
Skittish investors reacted quickly and the stock market tanked. It took the S&P 500 index almost six months to recover.
What’s happening today is similar.
The coming months of “extraordinary measures” look set for a long, drawn-out political wrestling match, with opposing Republicans using their votes on an extension as leverage to seek spending cuts.
As things stand, another down-to-the-wire debt ceiling extension seems likely.
This could cause a storm for the S&P 500 index, which is already hurting after a double-digit decline in 2022.
Credit card and mortgage rates
Credit card interest rates, as well as other interest-bearing loans like mortgages and auto loans, are tied to the health of the U.S. economy - which is facing dire straits in this debt default debacle.
The Federal Reserve raised interest rates from 4.25% to 4.5% during its final monetary policy meeting of 2022, pushing borrowing costs to the highest level since 2007.
When the fed funds rate goes up, the prime rate - the interest rate banks lend to customers with good credit - also increases.
This means borrowers must pay higher interest rates on their credit card balances. Mortgages could also become more expensive for American families.
According to the CEA: “These and other consequences could trigger a recession and credit market freeze.”
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