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Thursday, July 28, 2011

What’s on the line in a default?

In the month of June, the federal government issued 211.8 million “checks” (most were really electronic payments not actual paper checks). In the event of a default by the US government due to the failure of the Congress to reach an agreement on the debt ceiling, the effects could be felt immediately and directly by most households in the US.

Among other things, those 211.8 million “checks” would stop.

Let’s see who got those 211.8 federal payments:

  • Health care providers (doctors, hospitals, nursing homes, etc.): 100 million Medicare payment claims
  • Elderly and disabled (Social Security): 56.1 million
  • Hungry families and individuals (Food Stamps): 21.1 million
  • Low-income elderly and disabled (Supplemental Security Income): 8.3 million
  • Military personnel, active and retired: 6.4 million
  • Veterans Administration beneficiaries: 4.5 million
  • Federal workers: 3.9 million
  • Federal retirees: 2.6 million
  • Grants to the states, disaster relief payments, etc.: 2.5 million
  • Taxpayers (IRS tax refunds): 2.3 million
  • Non-defense government contractors: 1.8 million
  • Defense Department vendors: 1.6 million
  • Other retirees (Black Lung, Railroad, etc.): 1 million
Travel payments and reimbursements would be suspended, so military personnel, like any other government worker, would have to stay in place.

Unemployed folks receiving federal extended benefits, may not get them.

People working in jobs or for programs that count on federal grants or contracts may find themselves laid off. This will include a lot of people in education, public safety, health care, the environment, research, etc.

Federally-funded road and bridge construction would halt and the workers on those projects would be laid off.

Electric Boat would probably have to suspend operations, if not right away, then soon after a default. Likewise at the Kenyon textile mill. The Groton sub base, the Coast Guard Academy, the Naval War College in Newport and other federal installations may need to curtail their operations.

Other probable consequences include:
  • A prompt and large rise in interest rates, adding to further problems in the housing market
  • A sharp rise in unemployment due to direct default related job loss, and then to the ripple effect in the rest of the economy
  • A return to deep recession conditions
  • Suspension of business and consumer lending
  • International travel will become difficult for Americans, as the value of the dollar destabilizes and our credit cards may not be honored
  • Disruption of international commerce – we will stop being a reliable customer in world markets because of our overall credit problems and a sharp fall in the value of the dollar
  • Stock market prices will nose-dive, destroying share-holder equity and making retirement savings accounts wither in value
Tea Party Patriots co-founder Jenny Beth Martin met with reporters on July 27, 2011 and acknowledged that many Tea Party members – especially their core base of elderly retirees who count on Social Security and Medicare – would be hurt by a government default.

But in her view, that would be ok: "If it injures the people that we represent, but it's benefiting the whole country, that's what we need to be concerned about."

"As somebody who has gone through bankruptcy, I don't want to see our country into trouble that my family went through. I understand that means that you've got to sit there and look at: 'What can you do different? Can we sell anything? How can we get out of this mess?' And that's what our government needs to be looking at."

I am desperately trying to come up with a snarky comment about Ms. Martin’s philosophy of government, but I guess it really speaks for itself.

Author: Will Collette


  1. Beth Richardson comments
    There is no getting around the fact that if the debt ceiling is not raised many people who rely on Federal payments will be hurt. However these same people will be hurt and the credit rating of the country may be downgraded anyway if the government does not change its profligate ways. I think it will take this kind of desperate, downright painful, situation to make the belt-tightening happen. A similar situation is happening now with pensions in RI. Look at Central Falls. No one in government could bear to spare the money to put the pension fund in order; the monies were so needed elsewhere in the budget. Now there is no money to pay pensions. People on, or soon on, those pensions will be hurt. The difference with the Fed is that they can print the money as needed, which they have been doing quite a bit in the past few years. That cannot go on without devaluing the money or downgrading the credit rating. The situation is not pretty. No snarky comments needed.

  2. Hm... can we sell anything to get out of debt? Nowadays probably our most valuable exports are cultural: movies, music, etc. Maybe what we need to do is nationalize Hollywood...


  4. Donald Trump never pays his debts and even sues anyone who tries to make him pay them. Trump even filed for bankruptcy when he owned a casino, which is tantamount to owning a printing press for money. So if Trump doesn't have to pay his debts, why should the federal government?

  5. Hang in there Boehner. We need a balanced budget amendment to the constitution. Enough spending is enough. I have to balance my budget every month and live within my means, why can't the federal govt.

  6. Why can't politicians who are, for the most part, millionaires these days (who else can afford to run) give up their salaries to help out? Just wondering?



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