If the Republican-led showdown over the debt ceiling goes off the rails and results in a default on the nation’s obligations, the U.S. economy could suffer a severe economic blow, according to a new analysis by Mark Zandi, chief economist at Moody’s Analytics.
Williams Formula One driver Felipe Massa of Brazil crashes with his car in the first corner after the start of the German F1 Grand Prix at the Hockenheim racing circuit, July 20, 2014.
Moody’s economic model indicates that the economy could shrink by 4% in the event of a default, putting nearly 6 million people out of work as the unemployment rate soars above 7%. The stock market could lose a third of its value, destroying upwards of $12 trillion in household wealth. And interest rates would spike, producing an increase in borrowing costs that could linger for years.
Even just flirting with a default can have severe consequences, Zandi says. “The Treasury came closest to a default in summer 2011, when that debt limit battle was part of the budget wars between the Obama administration and Republican-controlled Congress that raged in the wake of the global financial crisis,” he writes. “The brinkmanship around raising the debt limit was especially heated and Treasury debt lost its AAA rating from credit rating agency Standard & Poor’s due to governance concerns raised by the political dysfunction.”
The bottom line: “A bedrock of the U.S. economy and global financial system is that the U.S. government pays what it owes in a timely way,” Zandi says. “If lawmakers are unable to increase, suspend or eliminate the debt limit before the Treasury fails to make a payment to bondholders or anyone else, the resulting chaos in global financial markets will be unbearable. The U.S. and global economies will quickly descend into recession. In the more than century since the debt limit became law, lawmakers have taken strident warnings like these to heart and acted. Let us hope they do so again. Soon.”