Eli5: What is a default in the Economy ?
In: 3
Someone just asked about the debt ceiling, so I wrote this, which should answer your question in a round about way.
If we default, the central banks credit score will go down and interest rates will march higher naturally, instead of artificially, which is what the fed has been doing to slow down the growth of the economy.
If you’re wondering why the Fed (US Central Bank) is trying to slow down the growth of the economy it is because inflation is getting higher. So why is inflation getting higher? The reason that inflation is getting higher is because unemployment is at 3%. So what does that mean? When unemployment is at a very low level prices go up. Well, why do prices go up? Prices go up because employers have to pay new employees more money, because there are no employees to fill the jobs because everybody’s already working. Why is that? Well when you pay employees more money, you have to get the money from somewhere so you have to raise the prices of your products or services. When the cost of things go up, that is called inflation. So, in a nutshell, inflation, as we see it right now in the United States, is in line with economic growth. But I thought economic growth was a good thing? Well, economic growth is usually a good thing. Unless you don’t have anybody to fill the jobs, then ya get too big for your britches and that’s when inflation sets in. (Or a bubble, ouch.) So wait you still haven’t explained why the federal governments central bank raises interest rates to slow down growth and how that happens. The easiest way to explain that is to say that if interest rates go up, people stop making big purchases, like automobiles and houses that require loans with interest payments because interest rates are so high.
The difference between the fed raising interest rates artificially, and our government not raising the debt ceiling and the central bank or Fed going into default is that if we go into default it is not artificial. If the central bank goes into default, it would be like you were all defaulting on a loan on a car or a home. everything will go to shit. It wouldn’t slow down the growth of the economy in a conservative in good way like what the Fed is trying to do right now to prevent a bubble. What it would actually do would be it would cause a bubble, better known as a stock market correction. Most people would just say a market collapse, because when a large portion of people lose 30-80% of their retirement, it doesn’t seem like a correction to anyone.
Oh, by the way, a little extra note. If the U.S. markets collapse, historically speaking, all other markets around the world fall like dominoes and we enter a recession/depression. So, the imaginary number that congress makes up that is called a debt ceiling is intended to stifle out of control spending. Everyone knows that when we reach it, there is no other choice but to move it up a few trillion dollars or start to eliminate some of the budget. Here are the top three catalogues which make up more than 3/4 of the budget.
27% Health and Medicare
33% Social Security, Unemployment, Labor
16% Military and Defense
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