I have been hearing about the US may defaulting onto Federal Debt and how this can affect us financially.
What would a freeze in credit market do?
In: 3
You would not be able to pay for things in terms other than full payment for the product before having it.
A lot of companies, including banks, are basically designed to rely on credit to manage cash flow. Instead of hoarding cash, you borrow a little bit overnight for a cheap rate to meet your immediate obligations and invest your “excess cash” – and over the long term you are a little bit ahead financially.
A credit market freeze basically means people stop lending, even safely. Banks don’t want to lend because there is so much uncertainty, so companies can’t pay employees and vendors, and the down stream effects snowball.
This was actually a significant problem during the onset of the 2007-8 Financial Crisis, and it’s why the Fed opened so many different credit and liquidity programs that were broadly available. The Fed gives banks extra money for low rates explicitly for the purpose of things like overnight lending to companies. Otherwise it exacerbates all of your other problems.
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