Would an American default really be that bad? Yes and here’s whyExBulletin

President Biden meets with House Speaker Kevin McCarthy, R-Calif., in the Oval Office of the White House on Monday. The United States may seem like the country that cried out about the debt ceiling, but many say that this year the country could actually default. What happens to the economy and ordinary people if it fails? Drew Angerer/Getty Images .

. Drew Angerer/Getty Images

President Biden meets with House Speaker Kevin McCarthy, R-Calif., in the Oval Office of the White House on Monday. The United States may seem like the country that cried out about the debt ceiling, but many say that this year the country could actually default. What happens to the economy and ordinary people if it fails?

Drew Angerer/Getty Images

The debate over the debt ceiling can be a bit like Groundhog Day: same tragedy, different year.

And, of course, the same warnings everywhere: that a US default would have catastrophic consequences for the global economy and for markets, making it likely that political leaders, as they have done before , will eventually reach a debt agreement.

Except this time around, many pundits fear it will be very different given the sharp divisions in the country’s political system.

And if Congress doesn’t reach an agreement in time, what exactly will happen? How much worse would things get if the United States defaulted for the first time in history?

Here are some of the things that could happen.

The reputation of the United States would take a dear blow

One of the results that would occur if the United States defaulted would be a blow to the international reputation of the United States.

“It would be a disaster and the government’s reputation for meeting its debt obligations would be in tatters,” said Darrell Duffie, professor of finance at the Stanford Graduate School of Business.

For some people, it’s something they can live with. A default may earn the United States a reputational black eye, it is thought, but it could be the boost the US government needs to rein in spending.

“That’s a perfectly reasonable view,” says Justin Wolfers, a professor of economics and public policy at the University of Michigan.

“Just like your family has to stick to a budget, you could say you want Congress to stick to a budget.”

But Wolfers is clear that’s not quite how it would go.

“Default on debt repayment does not reduce our spending,” he says. “It just means we are toughening up our creditors.”

And toughening up creditors would be expensive. The United States’ reputation for always paying its debts has helped the country borrow billions of dollars at very low interest rates from investors and governments around the world.

A poster in a bus shelter in Washington, DC on May 21 shows the national debt. The United States faces the prospect of a default as political leaders race to strike a deal to raise or suspend the debt ceiling. Currently, the country can borrow up to $31.4 trillion. Mandel Ngan/AFP via Getty Images .

Toggle legend Mandel Ngan/AFP via Getty Images

A poster in a bus shelter in Washington, DC on May 21 shows the national debt. The United States faces the prospect of a default as political leaders race to strike a deal to raise or suspend the debt ceiling. Currently, the country can borrow up to $31.4 trillion.

Mandel Ngan/AFP via Getty Images

So much money that the country can currently borrow up to $31.4 trillion, a debt ceiling that will need to be raised or suspended to avoid a default.

And if the United States defaulted, the interest rate on the country’s debt would rise because the United States would be seen as riskier: politically too dysfunctional to get its bills paid on time.

It’s similar to how someone’s credit card interest rate would go up if they started to miss payments.

The shock in the markets could trigger a global financial crisis

A real default would also cause a massive shock to financial markets, raising the prospect of another global financial crisis.

Investment bank UBS estimates that the S&P 500 could fall by at least 20%. Bond markets would crash, driving up borrowing costs across the economy, including for already high mortgage rates.

And banks would also be affected given that lenders are among the main investors in public debt. As a result, depositors and investors may start to worry about whether banks are on solid footing at a time when the banking sector has recently suffered from the bankruptcies of three smaller regional lenders.

“That’s when the financial system freezes,” says Wolfers. “That means there’s no more borrowing, companies stop investing, and markets go completely haywire.”

No money for schools, roads, social security checks

Wolfers also rejects some people’s argument that a flaw is the kick-start lawmakers need to start acting like responsible adults.

In fact, he argues, many members of Congress would probably be fine. But many other people wouldn’t.

Wolfers says that if the United States defaults and there is no more money to spend, the government would suddenly have no money to run basic operations, like schools and roads.

Government employees could see their pay delayed if the government runs out of money, while companies that have contracts with governments could also stop being paid for a while.

And the list of people who might miss vital government benefits is long, including especially veterans who rely on these payments as a lifeline as well as retirees who rely on Social Security payments.

All of these missed payments would have a direct impact on the economy.

Affected households may have to cut spending, and those with little or no savings may have to turn to credit cards, which carry increasingly high interest rates.

Two employees of Christie’s auction house tear down the Lehman Brothers company logo in London, England, September 24, 2010. Experts warn that a default on U.S. debt could trigger another financial crisis global market, similar to the one that hit in 2008. Lehman, an investment bank, was one of the most publicized victims of this crisis more than a decade ago. Oli Scarff/Getty Images .

. Oli Scarff/Getty Images

Two employees of Christie’s auction house tear down the Lehman Brothers company logo in London, England, September 24, 2010. Experts warn that a default on U.S. debt could trigger another financial crisis global market, similar to the one that hit in 2008. Lehman, an investment bank, was one of the most publicized victims of this crisis more than a decade ago.

Oli Scarff/Getty Images A US recession would be likely, and the world would suffer

The shock to financial markets and the impact across the board would be blows of such magnitude that many experts believe they would lead to a recession in the United States: unemployment could soar, lending could freeze and the economy could contract.

Moreover, due to the interconnectedness of the global economy, the problems of a major economic power like the United States would inevitably have global spillovers.

Ultimately, Duffie and other experts say the dire consequences are real risks, born of something the United States has done throughout its history: pay its bills on time.

“It’s the most critical part of the national economic security of the United States that the government can fund itself,” he says.

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