- The United States may default on its debt if an agreement to raise the debt limit is not reached.
- A US debt default could be catastrophic for the global economy, experts warn.
- Consumers in the US and around the world could face major economic hardships as a result of a default.
The United States is on the verge of defaulting on its debt—an unprecedented event that experts agree could send devastating shockwaves across the global economy.
The debt crisis stems from US lawmakers’ inability to raise the debt ceiling. The ceiling, also known as the debt limit, entails the amount of money the US government can borrow to pay its bills, which include legal commitments to fund everything from military salaries to healthcare benefits.
For decades, raising the debt ceiling has been routine since the US government runs a budget deficit and operates largely by borrowing money. Yet partisan division has prevented it from being raised in recent weeks, sparking widespread concern about an economic fallout. Moreover, since the US dollar is the global reserve currency, a US debt failure would have major international consequences.
“The consequences of a US debt default cannot be overstated,” said Matthew Blake, the World Economic Forum’s Head of Financial and Monetary Systems. “Policymakers should take all measures to avoid risky brinkmanship when managing the country’s finances.”
In a recent letter to Congressional leadership, Secretary of the Treasury Janet Yellen stated that a debt default “would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”
So how might a US debt default impact everyday consumers? Here are four consequences to be aware of:
A US debt default—even a short debt ceiling breach—is expected to push the US economy into a recession.
An analysis by Moody’s found that a prolonged default would cause real GDP to decline throughout the end of 2023, falling an estimated 4.6%. Prospects for long-term growth would diminish, too. “The economic downturn that would ensue would be comparable to that suffered during the global financial crisis,” the credit rating giant said in its report.
Meanwhile, an analysis released by the White House Council of Economic Advisers found that a protracted default could cause the economy to contract by over 6% later this year.
Economists note that a recession caused by a debt default could be especially harmful since the government would be unable to provide financial relief to the public. As the White House’s report states, the “government would be unable to enact counter-cyclical measures in a breach-induced recession, there would be limited policy options to help buffer the impact on households and businesses.”
An economic downturn in the US would also negatively impact global trade, putting pressure on economies across the world.
Financial markets to fall
US stocks are expected to fall dramatically as a result of a debt default. The White House’s report estimates that a protracted default could cause the stock market to plummet 45%.
The drop would significantly impact retirement accounts and consumer confidence, further exacerbating an economic slowdown, experts warn. A mass stock selloff, Moody’s states, could wipe out $10 trillion in US household wealth.
International stock markets are expected to take a hit, too. Already, stocks have been down in Europe as a result of the impasse in Washington.
The cost of borrowing US dollars could rise as a result of a debt default. Image: REUTERS/Gary Cameron
Unemployment to rise
As a result of the economic downturn, unemployment is expected to rise significantly and quickly.
Moody’s estimated that a prolonged default could wipe out nearly 8 million jobs, increasing the unemployment rate to over 8%. Even a short debt ceiling breach could cost 1.5 million jobs and increase unemployment to up to 5%, the agency found.
“A protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions,” the White House’s report adds.
Cost of borrowing to rise
A debt default would make it more expensive for the US to borrow money since the risk of holding Treasury debt would rise for lenders. This would cause interest rates to rise across the US economy.
In April, Fitch Rating stated that a US debt default would result in the country’s rating being moved to a “RD” (Restricted Default) classification and that impacted US Treasury securities would carry a “D” rating until the default is corrected.
“The risks engendered by the default would cause interest rates to skyrocket, including those on the financial instruments that households and businesses use—Treasury bonds, mortgages, and credit card interest rates,” the White House’s report states.
Meanwhile, US tech real-estate company Zillow estimates that a debt default would cause 30-year mortgage interest rates to rise to 8.4% in the coming months and home sales to fall 23% during the downturn.
Republished from the World Economic Forum
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