What Happens if the US Defaults On Its Debt? Where Investors Can Turn

By:

November 8, 2023

Updated

The combination of out-of-control spending, ceaseless printing, and astronomical debt has many investors wondering what happens if the US defaults on its debt. The question was virtually unthinkable just a few decades ago when the nation’s deficit was a fraction of where it stands today. With the US debt nearing $34 trillion and political gridlock reaching new heights, a complete debt default is looking more possible every day.

The Impact of De-Dollarization on US Debt

There’s a reason the US has been able to accumulate a deficit far surpassing that of other countries. Namely, the US dollar’s position as the world reserve currency has made it possible to borrow massive sums with limited consequences. Central banks around the globe place a large portion of their reserves in the greenback for economic stability and security. The high demand for the US dollar in conjunction with its abundant presence in the global economy leads to low interest rates for US borrowing.

The dollar’s privileged position has enabled the Fed’s experimental and disastrous fiscal policies under the banner of Modern Monetary Theory (MMT). These failed economic decisions have wreaked economic havoc across the globe which is why countries are pursuing a process of de-dollarization. This global shift away from the dollar essentially removes the only backstop preventing the complete collapse of the greenback, making debt default that much more likely.

What happens if the US defaults On its debt?

Government functions could fail.

One of the most immediate effects of a US debt default would be a severe restriction on government operations. Americans get a glimpse of this every time the government can’t increase the debt ceiling and low-stakes government operations such as the National Park Service are restricted for a few days or weeks. A full-blown debt default would be significantly worse. According to the White House, it would affect even the most basic and crucial functions of the government such as national defense and public health care.

The dollar would lose significant value.

The dollar’s value has been artificially propped up by its prestige as the world reserve currency. A US debt default would cause irrevocable damage to the dollar’s reputation in the global economy, further eroding confidence in its stability and security. The government’s inability to repay debts when they come due transforms the dollar from an economic boon to an unnecessary risk for foreign countries. The resulting drop in demand for USD could cause a rapid dollar devaluation.

Financial markets would tank.

Traditional financial assets including stocks, ETFs, mutual funds, and even bonds are directly linked to the performance of the dollar. As the greenback’s value falters in the wake of a US debt default, standard investment instruments wouldn’t be far behind. Furthermore, as the attractiveness of US assets wanes, central banks and international investors would pull out their investments in droves. With foreign countries holding 40% of domestic corporate equity, the ramifications of a global retreat from the US market could be catastrophic.

“When you get to these levels of debt and default, you start to lose confidence around the world in the dollar. A lack of confidence is what starts major currency collapses.”
– Precious Metals Sr. Advisor Damian White

Dollar alternatives might take hold.

The dollar’s once-firm grip on power within the world economy has been slipping for years. The US debt default could easily be the final domino to fall in the gradual decline of the dollar’s dominance. The ensuing battle for supremacy among dollar alternatives could yield any number of emerging currencies. For instance, China has been actively pursuing the petroyuan system as a foundation for its Renminbi currency. Even the BRICS nations have recently considered a gold-backed BRICS currency. The prevailing currency could dictate the direction of world economics and geopolitics for decades to come.

Gold prices could jump higher.

Ever since the US abandoned the gold standard, gold and the dollar have had an inverse relationship. Generally, gold prices rise as the dollar loses value. This makes a US debt default a potential tailwind for gold prices. Governments tend to increase gold holdings when economic uncertainty and instability are dominant. Recently, central bank gold purchases have been breaking records as countries seek shelter. The US defaulting on its debt could feasibly spark even higher gold demand, inevitably sending prices skyward.

“Gold is the opposite of debt.”
– Precious Metals Advisor Todd Graph

Will the US ever default on its debt?

Investors tuned into the political process understand that the debt default is used as a political football every year. Both parties use the threat of a default as leverage to pursue their agendas. Despite all the finger-pointing, name-calling, and tantrum-throwing, the government “surprisingly” pulls through in the 11th hour with a budget deal.

Like always, the American people end up suffering the brunt of the damage. With global confidence in the US dollar waning rapidly, this political theater can only remain a show for so long. It’s starting to have real-life implications as our increasingly partisan and petty political class flirts with an actual default.

During the last debt ceiling fiasco, JP Morgan analysts placed the odds of a US debt default at 25%. That’s not a reassuring number given the dire consequences of what happens if the US defaults on its debt. Unless the government makes a 180-degree turn away from failed policies and towards fiscal responsibility, these catastrophic events remain ever-increasing possibilities.

How to Invest in a Debt Crisis

Investors should NOT wait for a debt default to start making moves to protect their wealth. The dollar collapse won’t be a gradual process. It will happen instantly. As a result, smart money is already making investment moves to protect against the effects of a potential US debt default. Savvy investors have been stealing a page out of the playbook of central banks by scooping up more gold in anticipation of worsening economic conditions. Precious metals have a proven track record of hedging against inflation and preserving value no matter what happens on the international stage.

If you’re interested in learning more about diversifying with gold and silver, claim a copy of our FREE Precious Metals Investment Guide. You can also contact one of Scottsdale Bullion & Coin’s dedicated precious metals experts by calling 1-888-812-9892 or using our live chat function. Our advisors would be happy to help you determine an investment strategy that matches your goals and budget.

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