New Research Warns that a Debt Default Would Have a Devastating Effect on the US Economy

by Wall Street Rebel - Michael London | 03/07/2023 8:43 AM
New Research Warns that a Debt Default Would Have a Devastating Effect on the US Economy

An independent study determined that the Republican budget proposal would lead to a recession and widespread job loss if Mr. Biden approved it. This is because of the plan's reductions in government spending on health care, education, and other domestic services.


If Congress do not extend the country's borrowing limit before the federal government exhausts its capacity to pay its debts on schedule, Moody's Analytics chief economist Mark Zandi will warn a Senate panel on Tuesday that the US economy might lose one million jobs soon and enter a recession.

Mr. Zandi and his colleagues Cristian deRitis and Bernard Yaros warned in an analysis prepared for the Senate Banking Committee's Subcommittee on Economic Policy that a prolonged breach of the debt ceiling could result in the loss of seven million jobs and a financial crisis comparable to that of 2008.

The warning arrives when the economy is on the verge of collapse. In exchange for their vote to increase the debt limit, which controls the maximum amount of money the government can borrow, Republicans in the House of Representatives are demanding significant cuts in spending from President Joe Biden.

When Mr. Biden presents his most recent budget proposal on Thursday of this week, there is a good chance that the debate will heat up. It is anticipated that the president will suggest increasing taxes on high earners as well as corporations in order to reduce the nation's reliance on money that has been borrowed. However, it is almost certain that he will not be able to match the level of spending cuts that will satisfy the demands of Republican lawmakers to balance the budget in ten years.

If Mr. Biden gives in to those demands to avert a default, the report predicts that the economy will suffer severe damage as a result. According to what Mr. Zandi and his colleagues wrote, in that scenario, the "dramatic" spending cuts that would be required to balance the budget would cause the economy to enter a recession in 2024, would cost the economy 2.6 million jobs, and would effectively destroy an entire year's worth of economic growth over the course of the next decade.

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On Tuesday, Mr. Zandi is scheduled to appear before the Economic Policy Subcommittee when Massachusetts Democrat Senator Elizabeth Warren will host a hearing on the debt ceiling and its economic and financial ramifications.

"The only real alternative," Mr. Zandi said in an interview before his testimony, "is for legislators to reach an agreement and raise the debt ceiling promptly. Every other possible lead in substantial economic loss."

"The economy is quite fragile," he said. "Even without the debt ceiling crisis, the likelihood of a recession is strong. It won't take much to drive us in, and this is much more than "much."

The evaluations conducted by Mr. Zandi are regularly used by the administration of President Joe Biden in support of its economic policy initiatives. In this particular instance, Ms. Warren is making use of the research conducted by Moody's to encourage President Biden, in a letter that was delivered to the White House earlier this week, to reject the demands made by Republicans for spending cuts and, instead, to continue insisting on an increase in the debt limit.

Ms. Warren said in an interview that everyone has been talking about how dangerous it would be to default on the national debt up until now, and she is accurate. Giving down to Republican cuts, though, would represent an even larger danger to the nation.

She said, "The president has stood firm, and I encourage him to continue to do so," about the president's stance.

The forecasts made by Mr. Zandi are the most recent in a growing number of cautions issued by forecasters on Wall Street and at think tanks in Washington about the ramifications of delaying a rise in the borrowing limit for an extended period of time.

Republicans in the House have said that they would not raise the ceiling unless Mr. Biden agrees to major but unspecified cuts in federal spending. They feel that the nation's present levels of debt, which have been acceptable to both political parties over the last two decades as a consequence of the federal government spending more money than it collects in tax income, constitute a danger to economic progress now and in the future.

Mr. Biden has emphasized that although he is eager to discuss economic policy with Republican leaders, he is hesitant to negotiate the debt ceiling. The debt ceiling is the maximum amount of money the federal government may borrow to pay for commitments that Congress previously approved.

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In January, the federal government's debt reached the statutory maximum of $31.4 trillion. The Treasury Department is using what amount to accounting tricks to ensure that it can keep up with its regular vendor payments. Yet, their strategies are temporary. Independent organizations such as the Bipartisan Policy Center in Washington and the Congressional Budget Office predict that sometime between now and the beginning of autumn, the federal government will no longer be able to make timely payments to creditors, Social Security beneficiaries, or federal workers.. According to Moody's, that day, often known as the X-date, is expected to occur on August 15 this year.

The report examines potential solutions to the deadlock in Washington and offers numerous options. In one, President Biden takes action without consulting Congress to avoid hitting the debt ceiling, which might be challenged under the Constitution but could have little economic consequences. Members of the White House staff have frequently said that Mr. Biden would not go down that road.

The analysis predicted that there would be a swift backlash from financial markets if lawmakers' inaction caused the Treasury Department to miss some required payments to make other payments. The residual damage would be sufficient to trigger a mild recession and over one million people to lose their jobs even if Congress responded in the same manner as it did in 2008 by rapidly extending the debt ceiling.

The research concluded that "the impact to the economy would be devastating" if policymakers were to disregard the market's warnings and wait many months before hiking the cap. The level of expenditure by the federal government would plummet, a severe recession would develop, and the unemployment rate would skyrocket to more than 8% from its current level of 3.4%.

Yet, according to the research findings, if Mr. Biden were to adopt the budget plan proposed by the Republicans, the reduction in government expenditure, education, on health care and other domestic programs that would follow would cause a recession and widespread job loss. According to the findings of the study, those living in the United States with low incomes would most likely be the ones to face a disproportionately large amount of economic hardship.

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                       The slowing in the labor market is in hiring, says Moody's Mark Zandi


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