Moody’s Analytics economists Mark Zandi and Bernard Yaros think that politicians are playing a dangerous game of brinkmanship with the U.S. government’s debt limit, which could result in long-term harm for the economy just as it is struggling to recover from the COVID pandemic.
“Shutting the government down would not be an immediate hit to the economy, but a default would be a catastrophic blow to the nascent economic recovery from the
COVID-19 pandemic,” write the economists in a research note published Tuesday titled “Playing a dangerous game with the debt limit.”
The report comes as House Democrats are set to vote on legislation to avert a partial government shutdown and raise the U.S. debt ceiling, as Republicans say they won’t help raise the borrowing limit.
Federal operations are now funded through Sept. 30, and a bill by the Democrats would keep the government running through Dec. 3. At the same time, it would extend the debt limit through Dec. 16, 2022.
Minority Leader Mitch McConnell has said his party won’t support legislation that raises the borrowing limit. The Kentucky Republican argues that since Democrats are pursuing a spending bill without GOP support, President Joe Biden’s party should go it alone on the debt limit as well.
However, writing an op-ed in The Wall Street Journal, U.S. Treasury Secretary Janet Yellen warned that the government won’t have enough money to pay all its bills some time in October, absent an increase in the debt limit.
Yellen cautioned that a default on the country’s debts, which is what might happen if it doesn’t raise the debt ceiling, “would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency.”
Zandi and Yaros note that the Treasury limit was originally intended “to be a forcing
mechanism on lawmakers to remain fiscally disciplined,” but said that it has instead become highly disruptive to the fiscal process,” because it has been politicized.
Moody’s Analytics
Yellen warned that default on the country’s debts could trigger a spike in interest rates, and a steep drop in stock prices,” with investors attributing Monday’s downturn in the Dow Jones Industrial Average
DJIA,
the S&P 500 index
SPX,
and the Nasdaq Composite Index
COMP,
to worries about the debt limit, in addition to concerns about China’s embattled property developer Evergrande and anticipation of the Federal Reserve’s plans to announce tapering of its monthly bond purchases.
Zandi and colleagues warn that the mounting political “brinkmanship over the debt limit is thus painful to watch,”
“If lawmakers are unable to increase or suspend the debt limit before the Treasury fails to make a payment, the resulting chaos in global financial markets will be difficult to bear,” the economists write.
The Moody’s Analyitcs researchers estimate that the U.S. could default on payments on Oct. 20, if the debt-limit issue isn’t resolved.
This post was originally published on Market Watch
