US & World Economies US Economy Fiscal Policy Will the U.S. Ever Default on Its Debt? By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on December 31, 2021 Reviewed by Erika Rasure Reviewed by Erika Rasure Erika Rasure, is the Founder of Crypto Goddess, the first learning community curated for women to learn how to invest their money—and themselves—in crypto, blockchain, and the future of finance and digital assets. She is a financial therapist and is globally-recognized as a leading personal finance and cryptocurrency subject matter expert and educator. learn about our financial review board Fact checked by Emily Ernsberger Fact checked by Emily Ernsberger Twitter Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Two Ways the U.S. Could Default on Its Debt How a U.S. Debt Default Could Impact the Economy Avoiding Default on Its Debt Frequently Asked Questions (FAQs) Photo: Chip Somodevilla/Getty Images Throughout modern history, the U.S. has never defaulted on its debt. The government has a self-imposed borrowing limit known as the debt ceiling, and over time, it has raised or suspended that limit to help prevent the U.S. from defaulting on its debt. The debt ceiling was reached once again on August 1, 2021, the day after the suspension that was put in place by the Bipartisan Budget Act of 2019 expired. Congress must agree on whether to raise it again or suspend it to prevent default. Not raising or suspending the debt ceiling could potentially lead to volatile financial markets and a recession. The debt ceiling is the limit on how much debt Congress allows the federal government to have. On August 1, 2021, that limit was $28.4 trillion. If the ceiling was never raised or suspended, the U.S. Treasury Department would not be able to issue more Treasury bonds, which bring in revenue to help pay bills. The government would be forced to choose between paying federal employee salaries, Social Security benefits, or the interest on the national debt. If it doesn't pay that interest, the country would default. On December 14, 2021, the debt ceiling was raised once again, by $2.5 trillion—the new limit is around $31.4 trillion. This increase constituted the largest dollar amount increase in the national debt. Key Takeaways In modern history, the U.S. has never defaulted on its debt.The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have.If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy. Two Ways the U.S. Could Default on Its Debt There are two ways the U.S. could default on its debt: not raising or suspending the debt ceiling and not paying interest on Treasury bills, notes, and bonds. Not Raising or Suspending the Debt Ceiling The U.S. could default on its debt if Congress doesn't raise the debt ceiling once it’s reached. Congress also has the power to suspend the debt limit, as it did in 2019 with the Bipartisan Budget Act. When the debt ceiling is reached, the Treasury Department takes various emergency financial measures to help pay the nation’s bills, buying some time for Congress to make a decision on the debt ceiling. However, those measures can only last so long. In a statement on October 6, 2021, Treasury Secretary Janet Yellen stressed the urgency of raising or suspending the debt ceiling as a way to prevent default. “Treasury is on the cusp of exhausting its extraordinary measures if Congress has not acted to raise or suspend the debt limit,” Yellen said. “After that point, we expect Treasury would be left with very limited cash that would be depleted quickly.” When a decision on raising or suspending the debt ceiling is delayed, businesses and consumers often lose confidence in the nation, which could lead to higher interest rates, uncertainty in the financial markets, and a downgrade of the U.S. credit rating. U.S. debt has been seen worldwide as a safe investment. Most investors look at Treasurys as if they were 100% guaranteed by the U.S. government. Any threat of default could cause debt rating agencies, such as Moody's and Standard and Poor's (S&P), to lower the U.S. credit rating, and that could impact the stock market. For example, in April 2011, the S&P only lowered its outlook on the U.S. debt from AAA (extremely strong) to AA+ (very strong), yet the Dow Jones Industrial Average immediately dropped 140 points. Not Paying Interest on Treasurys The second way the U.S. could default on its debt is if the government simply decided that its debt was too high and it stopped paying interest on Treasury bills, notes, and bonds. In that case, the value of Treasurys on the secondary market would plummet. Anyone trying to sell a Treasury would have to sell it as a deep discount. The federal government could no longer sell Treasurys in its auctions, either, so the government would no longer be able to borrow money from investors to pay its bills. How a U.S. Debt Default Could Impact the Economy A U.S. debt default is much more than the federal government just needing to finally pay its debt. It would greatly impact the economy and people in the U.S. A default would increase interest rates, which could then increase prices and contribute to inflation. The stock market would also suffer, as U.S. investments would not be seen as safe as they once were, especially if the U.S. credit rating was downgraded. Several government programs like Social Security and Medicare would all be impacted, too. Military wages and even small business owners with federal loans would be at risk in the event of a default. Federal employees wouldn’t be paid and parents expecting a Child Tax Credit payment would get nothing. These financial impacts would have a major effect on consumer spending and businesses could shut down. Eventually, the U.S. could enter another recession as a result. Note The U.S. isn’t the only country to come close to defaulting on its debt. Greece is working to repay its debt after the European Union helped it avoid default in 2010, and Iceland actually did default in 2009, and banks collapsed as a result. How Can the U.S. Avoid Defaulting on Its Debt in the Future? Treasury Secretary Yellen said in an October 2021 statement that a U.S. debt default is “unnecessary” and must be avoided. “We are staring into a catastrophe in which we surrender this hard-earned reputation, and force the American people, and American industry, to accept all the pain, turmoil, and hardship that comes with default,” she wrote. The simplest way to avoid an immediate default on its debt is for Congress to raise or suspend the debt ceiling. One way to potentially avoid the U.S. defaulting on its debt is to increase revenue through higher taxes and spending cuts. This could help the U.S. government make more money to pay down its debt. The U.S. did this in the 1990s, and between a series of tax increases, defense spending cuts, and an economic boom, the U.S. saw four years of a budget surplus that it hadn't seen in 40 years. That helped reduce the national debt and prevent default. Frequently Asked Questions (FAQs) How would China suffer from the U.S. government defaulting on its debt? Like many other countries and individual investors around the world, China owns U.S. Treasury debt. In early 2022, China held more than $1 trillion in Treasury securities. If the U.S. were to default on its debt, China might not receive interest payments on those securities, and it could lose its investment altogether. What is the difference between government debt and the federal budget deficit? Debt and deficits are closely linked, but they aren't the same. Debt refers to how much you owe, while a deficit measures how much less income an entity has, compared to its spending. When a government spends more than it makes in taxes, then it has a budget deficit. If a deficit isn't corrected by raising revenue, then debt results. The higher the deficit, the more debt the government builds. Updated by Hilarey Gould Hilarey Gould Twitter Hilarey Gould has spent 10+ years in the digital media space, where she's developed a passion for helping people understand economics, saving, investing, credit card perks, mortgage rates, and more. Hilarey is the editorial director for The Balance and has held full-time and freelance roles at a variety of financial media companies including realtor.com, Bankrate, and SmartAsset. She has a master's in journalism from the University of Missouri, and a bachelor's in journalism and professional writing from The College of New Jersey (TCNJ). learn about our editorial policies Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The White House. "The Debt Ceiling: An Explainer." Congress.gov. "S.J.Res.33 - A Joint Resolution Joint Resolution Relating to Increasing the Debt Limit." Congress.gov. "H.R.3877 — 116th Congress (2019-2020)." Department of the Treasury. "Remarks by Secretary of the Treasury Janet L. Yellen to CEOs and Business Leaders at the White House on Debt Limit." National Credit Union Administration. "Impact of U.S. Debt Downgrade." S&P Dow Jones Indices LLC. "Dow Jones Industrial Average," Download DJIA Daily Performance History. Council on Foreign Relations. "Greece's Debt Timeline." Brookings Papers on Economic Activity. "The Rise, Fall, and Resurrection of Iceland: A Postmortem Analysis of the 2008 Financial Crisis." The Council on Foreign Relations. "The National Debt Dilemma." Department of the Treasury. "Major Foreign Holders of Treasury Securities."