How Would a U.S. Treasury Default Affect You?

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You gotta be thinking about this…at least I hope you are.  If you’re an investor with any portfolio of substance, the unrest associated with the financial institutions was nothing compared to what the sovereign debt default continuum might bring.  Here’s how I see it playing out:

Sovereign debt is going to default en masse. Greece is just the beginning.  Ireland, Portugal, France, Italy, and Spain will set off a chain reaction that dismantles the European Union.  The masters of the Old World will tighten the screws while the people take to the streets.  Americans will be horrified when they see this.  I think Americans will demand drastic spending cuts from our government.   The American people will wonder why we borrow money from other nations to offer free military defense to those very same nations. America may selectively default against those nations in a bi-partisan demonstration of disgust:  the leftists will cite human rights and the neo-conservatives  will giggle in delight that they can “harm” the Chi-Coms and Islamo-Facsist States through the most unconventional of weapons- the debenture.

Americans will respond to this default of our sovereign debt with a HUGE demand for government to be reduced drastically.    The sovereign default and subsequent currency collapse will be the light that shines brightly, exposing all of the cockroaches in the room.  NO will become the new YES for politicians but it still won’t be enough.  Woe betide the politician that expands existing entitlements programs come election day.

The U.S. Dollar will be devalued but so many other currencies will have collapsed it won’t feel too painful (unless you buy stuff from or travel frequently to Switzerland).  Financial pandemonium will last for about two weeks until the most likely technology emerges with a solution backed by the most likely institutions.  Tin-foil hat theorists shouldn’t worry about the One World Currency because demand for competing currencies will rise and the most likely technology will find a way to partner with asset protection firms.

Think through this.  One Sunday morning, you wake up and log on to my favorite news site to discover that the US Treasury announced it would default on its debt obligations.   Before you answer, consider to whom we owe money; the list might surprise you:

  • #14- Depository Institutions (i.e- banks- the places where you park your money)
  • #11- Insurance Companies (one of whom may hold the GIC in your 401-k)
  • #9- Oil Exporters (who would have to raise the price of oil to reharvest the losses)
  • #7- Pension Funds- (who guarantee your retirement “income”)
  • #6- State and Local Governments-(who, in turn, could default on federally-backed loans)
  • #5- Mutual Funds- (no explanation needed)

Now, here’s the big one. The Federal Reserve Bank is the largest holder of US Treasury securities.  This means that we owe more money to…ourselves than we owe anyone else.  Are you scratching your head like I am?

How would a domestic default affect you?  I’m pretty sure chaos would be the immediate result but if you read the linked article, you’ll find that I’m fairly optimistic that chaos wouldn’t be a permanent condition.  Long-term, I could see some great benefits to our economy. Relatively speaking, I think a US default, following Europe, would cause a “reset” in our financial markets and that favors the United States.

Short-term, there would be fuel, water, and food shortages.  I can’t see that lasting more than a couple of weeks, (nothing a garage full of bottled water and canned goods couldn’t cure).  Long-term, I think it would signal the end of fiat currencies, highly-leveraged fractional banking, and a rise in barter, all of which are interesting to me.  More interesting is the effect this might have on the currency and real estate investing.

Rahm Emmanuel thinks that he should never let a good crisis go to waste so I’d expect the Administration to try to exercise greater control over the real estate market.  That might be kinda tough for them to accomplish.  Fannie and Freddie would be dead,  The portfolio lenders (as we know them) could be insolvent, and private investors (READ: Hard Money) would most likely have taken a big hit.  We would have…a liquidity crisis.

I have no answers nor suggestions for you (yet).  I think some sort of technical default is more likely than not so I’m interested in your opinion.

About Author

Brian Brady

Brian Brady is a 22-year veteran of the financial services industry with the last 15 years in residential lending. He lives in Del Mar, CA, with his wife and daughter, and is active in the National Association of Mortgage Brokers, Knights of Columbus, and Chamber of Commerce.


  1. Why would the US be more likely to default rather than simply print money? The Federal Reserve and Social Security trust fund debts could be written off, since they are internal in nature. Apart from this, the path of least resistance would be (relatively) gradual inflation. Voters tend to toss out politicians who cause food shortages. National EU governments cannot order the ECB to print more euros. Congress can make the Fed print more dollars. Of course, inflation has its own problems in spades, but they are more gradual and overall less catastrophic.

    • Print more money? That could never be the solution to a default. Our money is backed by nothing, and only relies on people’s belief in it having value. Take people’s belief in the dollar out of the equation, and you’ve effectively printed holiday cards for your grandma on the other side of the world. Printing more dollars would just make everything worse slowly.

  2. It’s a very good article. Perhaps we should also ask if banks closed (bank holiday) even longer, how you get “money”? What would you use locally for “money”? How would you transfer funds over any type of distance…say 500-1000 miles without a bank?

    Ever looked at privately Digital Gold Currency?

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  3. Brian Brady

    “Ever looked at privately Digital Gold Currency?

    Not until today. Thank you.

    “Why would the US be more likely to default rather than simply print money?”

    I don’t know. Maybe they’ll continue to print money at the same rate they have but I suspect the consequences would be similar to a default

  4. Brian,

    Interesting article. Although I’m an eternal optimist, there must be some consequence to the current fiscal behavior. I know some people that are buying “survival seeds” and hoping for doomsday to hit so they can say they told everyone so.

    The financial crisis certainly has proven that even the world’s economic leader isn’t bulletproof. Despite this, the US has the best plan B, C, D, E, F….on earth. I think diversification is a good strategy but at the same time, I’m not stocking the bunker for doomsday.

  5. Brian

    B-F: (I wish I knew)


    The potential for high inflation is probably the thing that makes me feel most uneasy about the future. I saw China and India use a strategy of raising bank capital reserve requirements instead of raising rates to slow down the flow of money and keep rates low at the same time. I wonder if this is something the US would look at doing if inflation threatens us down the road. Would prefer not to revert to early 80’s style interest rates.


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