(cheerful music) - [Narrator] Party
leaders are still debating raising the debt ceiling as the deadline to default gets closer. But they do agree on one thing. - Defaulting on our debt is not an option. - Not an option. It will have catastrophic consequences. - [Narrator] They're not exaggerating. The US Treasury uses tax revenue and debt to pay the country's bills like funding government
programs, social security, and paying interest on existing debt. If it runs out of money and isn't able to pay these investors back, that's default, and that's what will happen if Congress doesn't raise the debt
ceiling to allow the Treasury to take on more debt. - Which would cause massive
upheaval in financial markets. Stock prices falling,
interest rates rising, probably the dollar falling too and that could affect a wide range of your own financial life. In a worse case scenario, it could cause a whole new recession. - [Narrator] It's because
US debt has become the core of the economy from Wall Street to
banks to interest rates. - US Treasury borrowing
is the center of gravity for almost all finance on the globe. - [Narrator] Here's why, how it works and what a default would mean for you. This is what the us debt
is made out of, bonds. Well, technically they could
also be a bill or a note but for our purposes, we're
going to call them all bonds. And they're not just how the federal government takes out debt. Bonds can be given out by
cities, banks, corporations because a bond is basically an I owe you. An investor buys say $1,000 bond. The government or business pays them interest on it in installments, and at the end of the
term, their $1,000 back. And that amount of interest is based on how risky that bond seems to investors. Companies that have a long
history of paying their debts, say Microsoft, pay a lower
interest to bond holders. The bank, Credit Suisse, paid nearly 10% on some riskier bonds
before those were wiped out when the collapsing bank was taken over. The higher the risk,
the higher the reward. - Investors are always calculating what's the extra return I want for the extra risk I'm taking? A lot of investors will ask what is the return I would get
if there was no risk at all? And their answer to that question has always been to look
at the US Treasury Bond. The US Treasury is seen as the safest and soundest borrower on planet Earth. - [Narrator] Which is why
it's considered a benchmark for all investments. - A benchmark is really the base off of which a lot of other borrowing is done. A lender will wanna have something larger than that benchmark. That's considered to be
the lowest possible rate. If the US Treasury is issuing at 4%, then corporate bonds or mortgage bonds or other governments
might issue it 5% or 6%. - [Narrator] You can see
that benchmark treasury rate here in this chart. Now here's the 30 year mortgage rate. Here's a grouping of AAA rated considered the safest corporate bonds. They go up and down in
relation to the US debt, which is always the lowest, the benchmark - It's kind of like the sun. Everything revolves around that benchmark, that US treasury rate. - [Narrator] It's more than
just the rate of the bond, it's the bonds themselves
that are so central. Wall Street firms, banks, companies, a lot of financial institutions keep money in US treasury bonds. - It's just always expected that the US Treasury is
gonna make good on its debt. - [Narrator] Bonds could
be affected two ways by this debt ceiling debate. A contentious fight could
make investors worry they may not get their money back on time, and as a result, they would most likely demand a higher interest
rate for their risk. The same could happen if the
big three credit rating firms have the same fear and downgrade
the US AAA credit rating. It's happened before. Standard and Poor's did that in 2011, citing the fight around the debt ceiling. But they were the only ones and it didn't have much
of an effect back then. The worst case scenario is if Congress doesn't
raise the debt ceiling and the US is unable to
pay investors on time and actually defaults. (ringer buzzing) Then US bonds, the benchmark, would be proven unsafe investments. If the value of the bonds go down, these financial portfolios would too. Investors would demand
higher interest rates for their higher risk and that would raise
interest rates for everyone. - It's kind of like being hit by a meteor. When you don't have confidence that the benchmark itself
is gonna be paid off, it creates uncertainty
in financial markets. When there's financial chaos, very often companies lay people off. So everybody has a stake in this. - [Narrator] An analysis by Moody's looked at the different scenarios. If the default is brief and the Treasury
prioritizes paying investors but not say senior social security, the already fragile economy
would have a mild recession with close to a million jobs lost. If the default goes on for
weeks and investors aren't paid, the economic downturn would
be comparable to 2008, costing more than 7 million jobs and wiping out $10 trillion
in household wealth. To avoid both scenarios, the
House, Senate and White House must agree to raise the debt ceiling before the June 1st deadline. Many experts call it, - The game of chicken. - [Narrator] But a game where we all lose if they don't raise it
before the clock runs out. (cheerful music)
