“It would be financial Armageddon,” Mark Zandi, chief economist at Moody’s Analytics, told CNN. “It’s complete craziness to even contemplate the idea of not paying our debt on time.”
But it’s a crazy world.
Lawmakers in Washington are again playing chicken with America’s creditworthiness. And the path to raising the debt ceiling is not clear.
Treasury Secretary Janet Yellen has stressed that raising the debt ceiling does not increase government spending. Instead, it just allows the government to pay for what it’s already agreed to spend. And if the debt limit isn’t raised, Treasury would lack the legal authority to continue borrowing. That’s a problem because the federal government spends more than it takes in.
A US default would undermine the bedrock of the modern global financial system.
“We pay our debt. That’s what distinguishes the United States from almost every other country on the planet,” Zandi of Moody’s said.
Soaring Treasury rates would set off a chain reaction in financial markets. That’s because Treasuries, viewed as risk-free investments backed by the full faith and credit of the federal government, serve as the benchmark by which virtually all other securities are measured.
Everything from stocks and bonds to exotic securities take their cues from Treasuries. A spike in Treasury rates sparked by a default would cause booming stock markets to become unglued.
“Stock prices would crater,” Zandi said. “We’d all be less wealthy, instantaneously.”
Not only would millions of Americans lose money in the stock market, but it would suddenly become more expensive for families and companies to borrow. That’s because Treasuries serve as the benchmark for mortgages, car loans, credit cards and corporate debt. A spike in borrowing costs is a huge problem for an economy that relies on access to credit.
If the debt ceiling is not lifted, then the federal government will technically default on some of its obligations. It would be forced to prioritize payments, deciding who will get paid and who won’t.
Ultimately, someone will lose out, whether it’s federal employees, veterans, Social Security recipients or defense contractors.
For all these reasons, investors are not freaking out about the debt ceiling. Wall Street expects Washington will eventually raise borrowing limit, like it always does. Failure to do so would simply be too dangerous.
Of course, this debate isn’t taking place in a vacuum.
“Playing politics with the debt ceiling is always a bad idea,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading, “but it is a uniquely childish notion given where we are with the virus and the economic recovery.”
In other words, a debt ceiling crisis, let alone an actual default, is the last thing the recovering economy needs right now.