If the government defaults on the nation’s foreign obligations, economists predict that interest rates would increase not just for the US Treasury, but also for consumer lines of credit, because domestic interest rates are tied to Treasury rates.
“If you default on interest payments then the rest of the world is going to be hesitant to buy US securities,” says economist Joel Naroff of Naroff Economic Advisors in Philadelphia. “While individuals might not see their credit rating go down, their cost of borrowing would go up.”
How much rates would rise depends on how governments, bond traders, and investors around the world react to a pending or actual default. If they're confidence in US debt is badly shaken, rates could go up a lot. If it's only a little shaken, it might not go up much at all. The only other time the US defaulted, temporarily and sort of accidentally, two economists found that Treasury bill interest rates increased about 0.6 percentage points and stayed elevated for months, according to Donald Marron, director of economic policy initiatives at the Urban Institute and Monitor guest blogger.
So what consumers would be affected by a boost in government interest rates? Buyers of homes and cars, for example.
"Anybody seeking a new loan would have to pay far more," says another Monitor blogger, former Labor Secretary Robert Reich and University of California, Berkeley, economist. "Anyone who was thinking of buying a house would probably stop thinking about it."
Homeowners with variable rate mortgages would also take a hit the next time their interest rate changes, he adds in a telephone interview.
This kind of across-the-board rise in consumer rates would, at the very least, slow economic growth.