How Grandma Responds to a Debt Default

When our leaders explain the impact of a debt default, they refer to deadbeat nations, economic calamities, and a sinking GDP.

Instead, telling us what could really happen, the Financial Times said the nation’s grandparents would “respond to their canceled retirement checks by knife-sharpening the tips of their walkers and thrusting them like lances at the nearest members of Congress.”

The Everyday Debt Default Impact

Thinking of you and me, below, I have defined debt default more broadly. To missed interest payments, I’ve added delayed fiscal obligations.

Social Security

Through the $25 billion that it spends monthly on Social Security, the U.S. Congress has promised payments to approximately 66 million people. Sent four times a month, mostly on Wednesdays; the SSA payment covers the rent and puts food on the table. For 40% of us, the average $1857 sent by the SSA represents 90% of a recipient’s income. Grandma’s delayed check could be catastrophic.

Other Entitlements

Like Social Security, by law, the Treasury has to send its Medicare and Medicaid payments each month. Doctors and hospitals need to be paid for the examinations and operations they perform and the medications they prescribe. Not paying a physician for a procedure can create the need for more medication or a longer hospital stay and a ripple of unintended consequences.

Federal Employees

Meanwhile, delayed paychecks could affect the two million people on the government’s civilian payroll. Beyond that, 1.4 million active members of the military could also be waiting for what is due them. Here, we are talking about the $25 billion that goes out on the first of every month.

NASA

Getting even more specific, we can look at NASA (National Aeronautics and Space Administration) as just one of many examples. In its Consolidated Appropriations Act, 2022, the Congress allocated $22.7 million to NASA for 21 projects. We can hypothesize that delayed funds could affect at least one of them:

Borrowing Costs

A default would increase the cost of borrowing money. After all, when we let someone else use our money, we want more if there is less of a chance we will get repaid. At the beginning of May, 2023, for U.S. Treasury bills with maturities near the “X-Date”, the yields already went up.

But that is only a beginning.

We, as taxpayers will see government’s expenses rise when it pays more interest to lenders. Then, those rates ripple through the economy until they reach each of us when we finance a car or a house.

Our Bottom Line: Allocation

Of course the Treasury still has many billions to spend. But, if they cannot borrow more, it is not enough to cover all obligations to, as the White House says, “creditors, contractors, and citizens.” Consequently, they are left with the question of who gets what. Do they delay Social Security “checks” so they can pay interest on bonds? Do they feed the animals at the National Zoo? Our featured image displays some other choices.

Returning to where we began and the tradeoffs economists always cite, we can remember our Grandma and Grandpa. Giving them more, means less elsewhere if we default.

My sources and more: To understand why default matters, we need to know how the money is spent. As a result, in addition to today’s post you might want to read this at the White House, this at CNN, this at FT, And finally, we can see the 21 projects that Congress said it would fund for NASA and the link to the projects in our featured image.