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Will I still be able to withdraw from my bank account if the U.S. defaults?

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closed as off-topic by Chris W. Rea, John Bensin, JoeTaxpayer, George Marian Oct 9 '13 at 0:48

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This question appears to be off-topic because it is an open-ended, hypothetical "what if" question. –  Chris W. Rea Oct 8 '13 at 19:21
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I think it's a valid question, and straight, knowledgeable answers, even with some necessary speculation on an unknown future, are just what people coming to this site by searching on a question like this will want to see. A lot of personal finance, after all, is making predictions about situations you yourself have never been in before; nobody's ever seen the U.S. Government default on its debt. I think it qualifies under the scope of "consumer protection". –  KeithS Oct 10 '13 at 1:13
    
@KeithS Ironically, the only answer citing precedences and referring to facts has been the most downvoted one as well. –  littleadv Oct 10 '13 at 1:58
    
By the way, the US government had defaulted before. Although widely mentioned that it would be the first time - that is not the truth. However, last time it happened, it was in the midst of the Great Depression, in an attempt to recover. Not the other way around. –  littleadv Oct 10 '13 at 2:00
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I also think this question should be left open. The answers below are very informative. This question is what lead me to discover money.stackexchange.com in the first place. I think it will help the site to grow in visibility. –  John Oct 10 '13 at 17:08

7 Answers 7

up vote 14 down vote accepted

You must mean the current debt ceiling debacle. The meaning of it is: US government is constantly borrowing money (by issuing treasury bonds) and constantly repaying some of the bonds that come to maturity, and also has other obligations it has to meet by law all the time - such as Social Security checks, bonds interest, federal employees' salaries and pensions, etc. By law, total amount of money that can be borrowed at the same time is capped. That means, there can be situation where the government needs to borrow money to pay, say, interest on existing bonds, but can not, since the limit is reached. Such situation is called a default, since the government promised to pay the interest, but is unable to do so. That does not mean the government has no money at all and will completely collapse or couldn't raise money on the market if it were permitted by law to do so (currently, the market is completely willing to buy the debt issued by US government, and with interest that is not very high, though of course that may change). It also does not mean the economy ceases to function, dollars cease to have value or banks instantly go bankrupt. But if the government breaks its promises to investors, it has various consequences such as raising the costs of borrowing in the future. Breaking promises to other people - like Social Security recipients - would also look bad and probably hurt many of them.

Going back to your bank account, most probably nothing would happen to the money you store there. Even if the bank had invested 100% of the money in US treasury bonds (which doesn't really happen) they still can be sold on the open market, even if with some discount in the event of credit rating downgrade, so most probably your account would not be affected. As stated in another answer, even if the fallout of all these calamities causes a bank to fail, there's FDIC and if your money is under insured maximums you'll be getting your money back. But if your bank is one of the big ones, nothing of the sort would happen anyway - as we have seen in the past years, government would do practically anything to not allow any big bank failures.

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The posturing about the debt ceiling is nonsense. It will get raised. –  mbhunter Jul 25 '11 at 0:21
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I agree it's nonsense. but that doesn't stop folks from trying to be seen as 'taking a stand' or casting blame, or all manner of other political infighting. I swear if the folks in congress have a motto these days it's "fix the blame, not the problem" –  Chuck van der Linden Jul 25 '11 at 6:22
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@mbhunter of course it will. The question is not if it will, but what would happen then. There are a lot of budget questions, and this vote is as good as any for each side to try and advance their claims. –  StasM Jul 25 '11 at 19:03
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What about the effect a default might have on the value of the dollar? Wouldn't it lessen the value of the money you have in your account? –  John Oct 10 '13 at 17:06
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@John The value of the dollar resides in the certainty that having the dollar bill(s) - paper or virtual - you will be able to purchase certain amount of goods and services. Since it is unlikely that people providing those goods and services will cease to accept dollars (most of them - in the US - have not much choice anyway since dollars are the only thing their customers have) - the value would not diminish significantly. Of course, some international entities may refuse to accept dollars or accept them with discount - but the effect probably would be very small. –  StasM Oct 11 '13 at 0:41

In principle, a default will have no effect on your bank account. But if the US's credit rating is downgraded, the knock-on effects might cause some more bank failures, and if the debt ceiling is still in place then the FDIC insurance might not be able to pay out immediately.

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I have been through default in Ukraine august 1998. That was a real nightmare. The financial system stopped working properly for 1 month, about 30% of businesses went bankrupt because of chain effect, significant inflation and devaluation of currency. So, it is better to be prepared, because this type of processes result in unpredictable situation.

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If you are actually referring to all the political rhetoric and posturing over the debt ceiling issue. That's a long ways from the US actually defaulting on paying debts. A lot of government offices might shut down, but I expect anyone holding US debt to be paid off. (they have the printing presses after all)

If that's what you are referring to, based on the LAST time that the governement had to shut down because they didn't raise the debt ceiling, it won't be a big deal. Last time, no debt was defaulted on, a bunch of the less essential government offices shut down for a few days, and the stock market did a collective 'meh' over the whole thing. It was basically a non event. I've no reason to expect it will be different this time.

(btw, where were all these republican budget cutters hiding when 10 years ago they started with a nearly balanced budget, and ended up blowing up the national debt by about 80% in 8 years time? (from roughly $6B to $11B) I wish they'd been screaming about the debt as much then as they are now. Not that there isn't ample blame to go around, and both sides have not been spending in ways that make a drunken sailor look like the paragon of a fiscal conservative, but to hear nearly any of them tell it, their party had nothing to do with taking us from a balanced budget to the highest burn rate ever while they were in control (with a giant financial crisis through in as pure 'bonus')

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I think that was the genesis of the Tea Party. Conservatives disenchanted with their own party talking a big game about fiscal responsibility, but not walking the walk. The last election brought in a lot of that splinter group's candidates, hence the reason it is a big issue now. –  JohnFx Jul 24 '11 at 19:08
    
Why not paying salaries is not a default? Why paying interest is obligation but following the letter of the law is not? what is the principle upon which you decide which promise to break constructs default and which doesn't? –  littleadv Oct 8 '13 at 17:54
    
Because 'default' has a very specific meaning, and refers to debts/loans/etc.. the phrase 'in default' has specific meaning, and does not relate to salaries. Think of it a little bit like a familiy with a brief fiscal tight spot, they might choose to still pay the mortgage and min credit card payments, but not pay the kids their allowance or perhaps be late paying the phone bill. Part of that decision might be that being 'in default' on loans to the banks or credit card folks will hurt their credit rating far more than being late on the power bill or the kids allowances. –  Chuck van der Linden Oct 18 '13 at 17:13

Government default doesn't mean that all US money is immediately worthless. First, the bondholders will get stiffed. Following that, interest rates will shoot up (because the US is a bad credit risk at this point) and the government will monetize its ongoing expenses -- i.e., fire up the printing presses.

If you're concerned about not having access to your money, start pulling out a little extra when you get cash at an ATM. Build it up over time until you have enough currency to weather through whatever emergency you envision with your bank account.

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The bondholders will be the last to get stiffed. That's the default the Republicans are afraid of, so this will never happen. What will happen is the medicare go unfunded, salaries not getting paid, pensions delayed, etc. Default, but of the kind Republicans will like, they'll call it "reducing spending". –  littleadv Oct 8 '13 at 5:39
    
@littleadv - Sorry, but you don't know that it will happen that way; the Executive branch controls the Treasury, not Congress, and while the President spends money under Congressional mandate, he's bound by conflicting laws and will have to break one on or shortly after Oct 17. Nobody knows yet what order obligations will be prioritized by the President. A failure to make social security or VA payments, or payments promised to states for education, welfare etc that the GOP would all call "low priority" would cause a massive outcry among constituents which Obama would not be able to downplay. –  KeithS Oct 10 '13 at 1:05
    
A bond default, to the average U.S. resident, seems more palatable, until you remind those who'll listen that the T-note yield is a key determinant of mortgage interest rates, credit cards, car loans, and pretty much every other type of consumer debt, all of which would skyrocket if the Full Faith and Credit of the United States Government were shaken fundamentally by a hard bond default. No loans and higher interest means no consumer spending, the homebuilders and auto companies go back in the crapper, and this time it'll be really expensive to spend our way out. It's just bad either way. –  KeithS Oct 10 '13 at 1:09
    
You're right. I don't know. No-one knows, that's why this question should have been left closed and deleted to begin with. But since we're all speculating here - your speculation is as good as mine. Whatever the obligation Obama chooses to default - his constituents will suffer. Why? Because everyone is his constituent. However, defaulting on bond obligations will cost everyone much more than not paying salaries for a couple of weeks, and the Republicans will be able to sell the "not paying salaries" as a win when they climb down their tree. –  littleadv Oct 10 '13 at 1:57
    
Told ya'all.... nbcpolitics.nbcnews.com/_news/2013/10/10/… Republicans won't let you stiff their own. If the treasury won't make the promise - they'll make it a law. But to stiff bond-holders? Big no-no for them. –  littleadv Oct 10 '13 at 21:33

FDIC is backed by the "full faith and credit of the USA." Well, if the USA defaults, the full faith and credit of the USA would in my mind be worthless, thus, so would FDIC.

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Far from "worthless" but certainly downgraded and worth less. –  MrChrister Oct 7 '13 at 16:56

There are many different things that can happen, all or some. Taking Russia and Argentina as precedence - you may not be able to withdraw funds from your bank for some period of time. Not because your accounts will be drained, but because the cash supply will be restricted. Similar thing has also happened recently in Cyprus.

However, the fact that the governments of Russia and Argentina limited the use of cash for a period of time doesn't mean that the US government will have to do the same, it my choose some other means of restraint. What's for sure is that nothing good will happen.

Nothing will probably happen to your balance in the bank (Although Cyprus has shown that that is not a given either). But I'm not so sure about FDIC maintaining it's insurance if the bank fails (meaning if the bank defaults as a result of the chain effect - you may lose your money). If the government is defaulting, it might not have enough cash to take over the bank deposits.

After the default the currency value will probably drop sharply (devaluation) which will lead to inflation. Meaning your same balance will be worth much less than it is now.

So there's something to worry about for everyone.

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Note that Russia's default is of a different nature than USs. They were borrowing at extremely high interest rates (up to 150% and even more in the last days before the default) in order to attract speculative capital, and with very short terms. They also had a currency rate peg policy, which meant when investors lost confidence in ruble the Central Bank had to spend money to prop up the currency. All these factors do not exist in the US case, so it is hardly comparable. US still can borrow, and relatively cheaply (if it is smart to do so is another question), but the law prohibits it. –  StasM Jul 23 '11 at 20:24
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I'd appreciate for the down-voter to comment, and not to hide. –  littleadv Jul 23 '11 at 23:28
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All I'm saying is that the US Treasury not paying a bill is unrelated to my ability to withdraw funds from my local bank. –  msemack Jul 26 '11 at 14:27
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-1 "There's no real answer to this question." Then, what are you doing? –  George Marian Oct 8 '13 at 17:46
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I vote to re-close the question. In hindsight, it has proven to be a source of extended discussion, debate, and speculative answers and therefore not a good fit for this site. –  Chris W. Rea Oct 8 '13 at 19:24

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