Federal Debt Default Could Lead to High Interest Rates, Maryville College Professor Says

MARYVILLE, Tennessee (WATE) – A possible federal shutdown is looming, which could impact not only some federal employees, but most Americans as well, according to an assistant professor at Maryville College.

On Monday, senators could not agree on a bill that would have funded the government and raised the debt ceiling. Reeves Johnson teaches macroeconomics. He said that not raising the debt ceiling is the biggest problem.

He said the United States had never raised the debt ceiling, which would lead the government to default on its loans. Johnson said if the government couldn’t pay off its debts, there would be a huge ripple effect.

“The federal government, when it spends, either issues debt or uses tax money, essentially,” Johnson said.

If Congress does not raise the debt ceiling, then the federal government will have to find other ways to fund costs while paying past debts.

Johnson said that with the pandemic requiring more spending and lower taxes for the federal government, our country’s debt has increased dramatically.

“(The government) should use tax money. He has his own account where he keeps this money. And that money is obviously limited and it could drop to zero, ”Johnson said.

He said never in history has the United States defaulted on its debts by not raising the debt ceiling. He also pointed out that there are only two countries in the world that have a debt ceiling – the United States and Denmark.

“It’s a little unfathomable to think the government wouldn’t pay you back, and that’s the risk we apparently face,” Johnson said.

Johnson said if Congress didn’t raise the debt ceiling, then just about any American with a loan could be affected.

“These interest rates would increase on government debt, but with that, also interest rates on mortgages because they are very closely related to the interest rates on government debt; interest rates on auto loans, ”Johnson said.

He said it could have a negative impact on retirement savings as well. In addition, he said global stock investors would most likely sell their stocks and redeem in their own country’s currency.

“Because now the US dollar is worth less than it was before. It is no longer seen as the world’s reserve currency, ”Johnson said.

Johnson noted that this was a political fight, but he believes Congress will somehow resolve the issue before the government’s fiscal year ends at midnight on Thursday, September 30.

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