According to one analysis set to be revealed Tuesday, if Congress fails to increase the debt ceiling and the US defaults on its payment obligations this fall, the US will enter an instant recession.
According to Mark Zandi, chief economist at Moody’s Analytics, a lengthy debt-ceiling deadlock could cost the US economy up to 6 million jobs, wipe out up to $15 trillion in personal wealth, and send the jobless rate soaring to nearly 9% from around 5%.
Both parties agree that raising the debt ceiling is necessary to avoid economic disaster, but their disagreement over doing so has grown. Even though previous President Donald Trump increased the national debt by nearly $8 trillion, Republicans have vowed to oppose President Joe Biden’s spending plans by refusing to let Democrats raise the debt ceiling.
The Treasury Department has stated that it will use all of its “exceptional measures” to fulfill US commitments by the end of October, leaving lawmakers with little time to act to avoid disaster.
“This economic scenario is cataclysmic. … The downturn would be comparable to that suffered during the financial crisis” of 2008, said the report, written by Zandi and Bernard Yaros, assistant director and economist at Moody’s Analytics.
The maximum amount of debt that the Treasury can issue to pay its bills is the debt ceiling. It was put on hold from 2019 until last month as part of a Trump administration accord.
Treasury would be unable to pay debts as they become due if Congress fails to raise the debt ceiling. Last Monday, Treasury Secretary Janet Yellen stated that a default of this magnitude would be unprecedented in US history. Although Treasury has not provided a more definite date, Moody’s “best guess” is October 20.
At that point, Treasury officials would have to make difficult decisions, such as whether to pay $20 billion in Social Security benefits owed to seniors or whether to pay investors of US debt – a decision that may erode confidence in US credit and permanently raise federal borrowing costs.
Failure to lift the debt ceiling will have disastrous consequences for the world’s financial markets. Interest rates would rise as investors demanded a higher rate of return for the danger of taking on US debt in the face of repayment uncertainty.
An increase in interest rates would have a cascading effect across the economy, increasing expenses for taxpayers and consumers and other borrowers. In the long run, the value of the US dollar would fall as investors questioned the safety of buying US treasuries. Auto and housing loans would become more expensive.
“Stock prices would be cut almost in one-third at the worst of the sell-off, wiping out $15 trillion in household wealth,” the Moody’s report finds. The market would rebound once the impasse is resolved, but some losses would be permanent.
“Treasury yields, mortgage rates and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume.”
Both sides are convinced that a breach of the debt ceiling will be avoided. Both White House officials and Republican lawmakers have stated that the debt ceiling will be lifted or suspended in recent days. They are, however, sharply divided on how this will be accomplished.
Republicans have argued that Democrats should raise the debt ceiling on their own because they are proposing trillion-dollar spending plans. Democrats, on the other hand, have rejected this approach, claiming that the current national debt levels, which necessitate lifting the debt ceiling, are the result of a variety of policy priorities shared by both parties. Regardless of the expenditure package undertaken by the Biden administration, the debt ceiling would have to be lifted or suspended.
The way forward is hazy. Democrats in Congress revealed a plan on Monday to bundle the debt ceiling delay with money for the federal government, which is slated to shut down at the end of the month, and disaster relief and Afghanistan resettlement monies.
Republicans are anticipated to filibuster the bill, with even moderate Republicans stating that they will vote against it to include a debt-ceiling increase. The Democrats will then have to decide what to do next.
Even addressing the issue before the debt ceiling is broken might have long-term consequences for American taxpayers and the economy. According to Zandi and Yaros, the Obama administration’s budget conflicts over the debt ceiling in 2011 and 2013 produced financial uncertainty and depressing company investment, costing the US economy $180 billion and 1.2 million jobs by 2015.
In the past, both parties have worked together to lift the debt ceiling. Making it a political pawn would endanger foreign trust in the US government, raising borrowing costs even if the debt ceiling is not broken. “Brinkmanship around this whole process will be reflected in a higher cost to taxpayers,” Zandi said in an interview. “There is a cost to doing this in a way that is not at least somewhat bipartisan.”
Source: WV News