Economists are increasingly worried that the United States will hit its debt ceiling in the coming weeks and become unable to pay all its bills, creating new turmoil.
Treasury Secretary Janet Yellen has warned that a stopgap measure to circumvent the ceiling expires on June 1, after two major political parties failed to agree on raising the $31.4 trillion US federal debt ceiling.
At that point, the U.S. federal government will face a variety of unacceptable options, from delaying payments to contractors, Social Security beneficiaries, Medicare providers or agencies. The US government defaults on its debts. You can also ignore the cap and continue with the spending program.
In any of these scenarios, analysts believe political, financial and economic crises will be hard to avoid.
The parliamentary dispute is the deepest in at least a decade, but Mohamed El-Erian, president of Queen’s College, Cambridge University, said speculation remains that a last-minute deal between Democrats and Republicans remains. If that fails, “we should expect another layer of financial volatility in a system that has already lost much of its anchor.”
“It will come at a time when the global system is facing headwinds of growth and inflation and trying to contain the tremors of banks to certain sectors of the US system,” he added.
“It amplifies all the other concerns people have,” said Nathan Sheets, global head of international economics at Citigroup and a former U.S. Treasury official. “The debt ceiling has a synergistic effect, making people a little more nervous and a little more nervous about this kind of systemic risk.”
The last time the United States approached the debt ceiling was in 2011. An agreement was eventually reached, but four days later the credit rating agency Standard & Poor’s stripped the US government of its AAA rating from the debt. The downgrade sent U.S. stocks down more than 5% in his day, exacerbating the deepening eurozone crisis.
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said the U.S. economy is stronger in some respects, especially as the unemployment rate has fallen. But even reaching the debt ceiling would still be a destabilizing blow. “If you had the flu, you wouldn’t want to be hit by a bus, but you wouldn’t want to be run over by a bus,” he said. “Even if the economy looks a little different [than 2011]it’s going to be a bad situation.
It is impossible to accurately estimate the exact consequences of repeatedly breaking the debt ceiling and cheating. But US officials think they’re going to get serious.
At a press conference this week, Fed Chairman Jay Powell stressed that failing to raise limits would throw the US economy into “uncharted territory”. , “can be very high”.
“We shouldn’t be talking about a world where the US doesn’t pay the bills. It shouldn’t matter,” he added. “No one should think that the Fed can protect the economy, the financial system, and our reputation from the damage that such an event might bring.”
In 2011, the U.S. Treasury Department planned to keep the government from defaulting on Treasury bondholders by cutting spending. But that would mean a drastic cut, which could plunge the U.S. economy into recession and weigh on global growth.
According to the White House Council of Economic Advisers, a prolonged U.S. debt default “is likely to cause severe damage to the economy, with job growth losing millions of dollars from the current robust pace of earnings.” They predict an “immediate and sharp recession” with the recessionary severity seen during the global financial crisis more than a decade ago.
Even defaults quickly fixed can cause a sharp decline in growth. Moody’s economists warn he could lose 2 million jobs in such a scenario.
Economists at the Brookings Institution, a Washington think tank, warned in a recent report that even short-term stagnation would lead to “lasting and wholly avoidable damage.” Authors Wendy Edelberg and Louise Sheiner He said the extent of damage was highly dependent on how the government chose to prioritize payments.
El-Erian said the economic impact of a default would be “potentially greater” than delaying other government payments, but even in the latter scenario, “there are concerns about the potential economic repercussions.” Let’s go.
With so much at stake, analysts are beginning to warn clients.
Swiss lenders UBS’s Evan Braun and Luke Kawa say a default on U.S. Treasurys is unlikely as it constitutes a “major financial crisis” and the Treasury Department prioritizes meeting its obligations. Ironically, weaker growth could push US Treasury bond prices higher as markets begin to price in further Fed rate cuts later this year.
Bank of America analysts say reports that the dollar has replaced the dominant role in global trading are “greatly exaggerated”, but that defaults due to the debt ceiling confrontation are “a store of value”. It undermines the attractiveness of the dollar as a tool,” he said.