- Congress’ failure to raise the Treasury’s debt ceiling would cause corporate borrowing costs to soar, wipe out $15 trillion in wealth and add 6 million to the number of unemployed, Moody’s Analytics saidas a partisan deadlock over the debt ceiling persists despite the prospect of a US government default next month.
- “A default would be a catastrophic blow to the nascent economic recovery from the COVID-19 pandemic,” said Moody’s Analytics chief economist Mark Zandi. “Global financial markets would be turned upside down, and even if resolved quickly, Americans would pay for this default for generations, as global investors would rightly believe that federal government finances have been politicized.”
- A default would force global investors in Treasuries to demand higher interest rates, worsening U.S. fiscal challenges and slowing economic growth, Moody’s Analytics said. Equity prices would fall by nearly a third, short-term funding markets would close, and interest rates for corporate borrowing, mortgages, and consumer loans would rise.
Overview of the dive:
The Treasury has not been able to borrow money since August 1 and the reinstatement of a limit on US debt required by law. The Treasury paid US bills using available cash. Those funds could run out on Oct. 20, when the Treasury makes a payment to Social Security recipients exceeding $20 billion, Moody’s Analytics said.
Senate Minority Leader Mitch McConnell (R-Ky.) and other Republicans declined to support raising the debt ceiling, saying it would allow for even more overspending by Democrats. Congress is considering a Biden administration proposal to spend $3.5 trillion on fight climate change and expand federal programs in health, education, child care and other social services.
“My advice to this Democratic government, to the House and to the Senate: Don’t play Russian roulette with our economy,” McConnell said Wednesday at a press conference. “Step up and raise the debt ceiling to cover everything you’ve been engaged in throughout the year.”
Democrats say Republicans have an obligation to vote to raise the debt ceiling, noting that the national debt rose by nearly $8 trillion when Republicans controlled both houses of Congress under the Trump administration.
“Republicans have racked up billions of dollars in debt under Trump and are now demanding that American families bear the brunt of the default,” said Senate Majority Leader Chuck Schumer (DN.Y.) said yesterday. “It’s nothing less than a dinner of historic proportions.”
Throughout the standoff over the debt ceiling, leaders from both sides agreed that a US default — the first in history — would be catastrophic.
“A delay that jeopardizes the federal government’s ability to meet all of its obligations would likely cause irreparable damage to the U.S. economy and global financial markets,” Treasury Secretary Janet Yellen said. a letter dated September 8 to the leadership of the Congress of both parties.
“At a time when American families, communities and businesses are still suffering the effects of the ongoing global pandemic, it would be especially irresponsible to jeopardize the full trust and credit of the United States,” Yellen said.
Budget battles between the Obama administration and the Republican-controlled Congress in 2011 and 2013 caused uncertainty that dampened business investment and hiring and slowed economic growth, Moody’s Analytics said.
Without the partisan wrangling, by mid-2015 gross domestic product would have been 1% higher and the unemployment rate would have been 0.7% lower, with 1.2 million more workers employed, Moody’s said.
Political uncertainty “will certainly increase in the coming days, making businesses more reluctant to invest and hire, entrepreneurs less likely to start businesses, and financial institutions cautious about extending credit,” Moody’s Analytics said. .