Here’s What Could Happen If Republicans Don’t Raise The Debt Ceiling

No one is sure exactly what the US economy would look like after a government debt default, but economists are sure of one thing: It would be bad.

Very badly. Like “cats and dogs living together” mean.

House Republicans insist they won’t vote to raise the debt ceiling without sharp as-yet-unspecified spending cuts, but President Joe Biden has said he won’t negotiate with all the faith and credit in the country.

The debt ceiling standoff went from simmering to the fore on Monday with Treasury Secretary Janet Yellen’s warning to the the government could run out of cash in early JuneAnd experts warn that not giving the Treasury more room to borrow before it defaults would have catastrophic consequences, not just on Wall Street but on Main Street as well.

“Our economy is made up of people. So when people don’t do well, our economy doesn’t do well,” said Rakeen Mabud, chief economist at the left-leaning Groundwork Collaborative, a group of progressive economic think tanks.

“Seniors wouldn’t get their Social Security checks, service members wouldn’t get their pay, families wouldn’t get the cash they need to pay for food. And that would be an absolutely devastating economic consequence.”

Douglas Holtz-Eakin, former director of the Congressional Budget Office and chairman of the conservative think tank American Action Forum, said the downward economic spiral would start with terrified investors selling Treasury debt.

Because that debt serves as a benchmark by which other things like mortgages and credit cards are valued, a liquidation would lead to an increase in interest rates. He said that there would be chaos in the financial markets, and that the end result would be the end of the status of the US dollar as the basic unit of the global economy.

“Financial chaos and recession is likely and no particular way forward because there is no other reserve currency in the world right now. So something would have to intervene, and it’s not obvious what it would be,” he said.

And the Federal Reserve, which typically floods the economy with money in such crises, might not necessarily be able to help, its chairman said Wednesday.

“No one should assume that the Fed can protect the economy from the potential short- and long-term effects of not paying our bills on time,” Jerome Powell said at his news conference Wednesday after the central bank rate. – setting meeting.

Powell said the idea of ​​the United States not paying its bills shouldn’t even be considered. “It just, it just shouldn’t be a thing,” he said.

There have been attempts to quantify exactly how bad things could get. While they differ on the details, the answer is still pretty bad.

The White House Council of Economic Advisers (CEA) said on Wednesday that a prolonged default would result in 8.3 million more unemployed and the unemployment rate shoots up by 5 percentage points. In addition, the stock market in the first quarter of default would fall 45%, he said.

“Because the government would not be able to enact countercyclical measures in a default-induced recession, there would be limited policy options to help cushion the impact on households and businesses,” the CEA warned.

About 7 million people would lose their jobs, pushing the unemployment rate to 8% from 3.5% today, according to Mark Zandi, chief economist at financial research firm Moody’s Analytics. Economic growth would decline by 4% before bottoming out in its projection.

“Based on Moody’s Analytics model simulations of the US and global economies, the ensuing economic downturn would be comparable to that experienced during the global financial crisis,” he said in testimony before the Senate Banking Committee in March.

Zandi was an adviser to Republican presidential candidate John McCain but has found favor with Democrats in recent years.

Brookings Institution economists Wendy Edelberg and Louise Sheiner said just the possibility of default could raise interest rates. They pointed to estimates that the government can borrow about a quarter of a percentage point less than other countries due to investor appetite for risk-free Treasury debt.

If that cousin disappeared, they said, she could will cost $50 billion next year and a cumulative $750 billion over the next decade in higher interest costs.

And it’s not like the Treasury market is in great shape, after years of having to absorb larger deficits caused by spending under former President Donald Trump, then COVID measures, and again under President Joe Biden.

Peter Orszag, another former CBO director and Barack Obama’s budget director, said Tuesday on CNBC that the gap between the prices that bond buyers have been willing to offer and what bond sellers have been willing to accept has widened. expanded, indicating a weaker market.

“The Treasury market is less liquid than it has been historically, which means that if there are tremors, they can have a pronounced impact,” he said.

And there are already some small signs of nervousness.

Every three months, representatives of the large Wall Street financial firms that buy and sell Treasury debt meet regularly with Treasury officials to discuss debt management.

At Tuesday’s meeting, the advisory panel said the amount of cash the government has on hand was not only below what they believe is necessary and required by Treasury’s own policies, but also “significantly below what even the largest banks in the country have liquidity available despite managing significantly smaller balance sheets.”

they said in a report to the Treasury: “Uncertainty about the ability of the Treasury to finance the government is detrimental to the Treasury market, business and consumer confidence, and the availability of credit, which is already expected to contract.”

Mabud and Holtz-Eakin said there was a rare consensus among economists of various ideological persuasions that a default would be disastrous.

“Experts across the board have made it quite clear that a default would be devastating to our economy,” Mabud said. “This is not a partisan issue.”

Holtz-Eakin noted that how long the US was in default might make a slight difference, as a brief default may not hurt markets and the economy nearly as much as a long one. But it’s not worth finding out.

“There are some questions you just shouldn’t want to know the answer to,” Holtz-Eakin said, “and that’s one of them.”

Arthur Delaney provided additional reporting.