A government default on its obligations could make otherwise safe investment choices like money markets much riskier.
Investors have $2.7 trillion stashed in money funds, says the Investment Company Institute, the funds' trade group, USA Today reports.
Those investments have long been considered safe and convenient. But is that status in danger?
The government is running up against its $14.3 trillion debt ceiling, and unless Congress agrees to lift that limit, the government could default on its debts around Aug. 2, and a default could spell trouble.
"Money funds have $684 billion in U.S. government debt. In the event of a default — the government not paying interest or principal — funds are generally required to sell that security in an orderly fashion," author John Waggoner writes in a USA Today column.
"Funds have an additional $491 billion in repurchase agreements. These are short-term collateralized loans, and Treasury securities are typically the collateral. It's never good to have a collateralized loan when the collateral is in doubt."
Republicans and Democrats both want to avoid default, but are at odds over terms surrounding raising the ceiling, with the former opposed to certain tax hikes and the latter opposed to certain spending cuts.
That battle appears to be scaring consumers away from spending, Goldman Sachs reports, citing dropping consumer sentiment indices as examples.
"While it's certainly possible that the drop in confidence reflects other factors ... the extent, timing, and composition suggests that the uncertainty surrounding the debt ceiling is probably a contributing factor," the investment banks writes in a report, according to the AFP newswire.
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