An agreement to raise national income will be signed within days loan limit That’s not necessarily a perfectly clear signal for the US economy.
Sure, that would get around the “”.economic and financial catastropheenvisioned by the Secretary of the Treasury Janet Yellen.Its doomsday scenario has a global character Financial markets are in turmoil, mortgage rates are rising, seniors are missing Social Security checks And millions of jobs were lost.
But while a default was narrowly avoided, the 11-hour deal, which is nerve-wracking, driving stocks down and pushing rates up, could still do some damage, as did similar confrontations in 2011 and 2013. It could further boost vulnerable financial institutions. economic into the recession. That is far more likely than a debt limit breach triggering a financial crisis.
“The economy is already very fragile and on the brink of a recession,” said Mark Zandy, chief economist at Moody’s Analytics, and is one of a handful of economists who expect the U.S. to avoid a recession this year.
A tight, tortuous deal that disrupts an already volatile market could lead to a recession “very likely,” Mr. Zandi said.
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What is the debt ceiling?
The debt ceiling is the upper limit It’s based on how much the government can borrow to pay for everything from Medicare benefits and military salaries to paying off past debt to bondholders. Consensus and approval votes do not promise additional spending. It just increases the amount the government can borrow to pay for the pledges already passed by Congress.
If the cap is not raised, the government will be forced to pay the bills solely from tax revenues. That would force the Biden administration to decide whether to pay Social Security recipients, federal employees or bondholders who lend money to the government.
If the U.S. fails to repay bondholders, it will default, but the economy will still suffer if it fails to fund other government spending.
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Yellen said the government could run out of money to pay as early as June 1 if Congress doesn’t raise the country’s borrowing powers, and by the time President Joe Biden and Republican lawmakers reach a deal. He said he would give him a little over two weeks. Republicans are calling for drastic spending cuts, but Mr. Biden argues that such budget negotiations should be independent of the debt ceiling.
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What happened to the 2011 and 2013 debt ceilings?
In 2011, Republicans similarly demanded that President Barack Obama agree to cut the budget deficit in exchange for raising the debt ceiling. The deal was reached on July 31, just two days before the government’s borrowing authority expired. Despite the deal, the brinkmanship fueled uncertainty over the country’s creditworthiness and led S&P Global Ratings to downgrade the US credit rating for the first time in history.
The S&P 500 index fell about 17% during the turmoil, not recovering until the following year, and a $2.4 trillion drop in household wealth, according to a Treasury Department report. Even after the debt ceiling deal was reached, consumer and business confidence plummeted for months and never fully recovered. Borrowing costs, such as mortgages, have risen. And consumer and business spending fell, the Treasury report said.
Overall, Zandi estimates that the crisis caused an economy still recovering from the Great Recession of 2007-2009 to contract at an annualized rate of 0.16% in the third quarter. Without it, he believes the economy would have expanded by 2.6%. He believes the stalemate has pushed the unemployment rate up by 0.3 percentage points and removed 340,000 jobs.
There was a similar confrontation in the fall of 2013, when Congress raised the debt ceiling the day before the October 17 deadline. Hundreds of thousands of federal workers were furloughed in early October, with the federal government partially shut down with no prospect of an agreement.
Zandi said the crisis cut GDP growth by 0.5 percentage points in the fourth quarter of 2013, with about half of the damage coming from partial shutdowns and the rest from the disruptions that robbed consumers and businesses of confidence and spending. We presume it is due to the cloud of certainty.
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How much damage could today’s debt ceiling drama do to the economy?
Even if agreement is reached, the impasse creates uncertainty. Yields on short-term government bonds that mature after June 1 have surged. And the cost of credit default swaps, insurance against the U.S. default, is at a record high. The stock market has generally been on the mend in the dispute, but has become more volatile in recent days as the deadline approaches.
The White House estimates that even an 11-hour deal could increase borrowing costs and hurt investments, even assuming the debt limit isn’t breached. It could be:
- It cuts the GDP growth rate for the third quarter by 0.3 percentage points.
- Reduce employment by 200,000 people.
Zandy agrees — if a deal is reached by the end of next week. A possible scenario, Zandi said, is that the two countries could agree to raise the debt ceiling for a few months, then vacillate to raise it again in September, before the end of the year, coinciding with negotiations on the 2024 budget. It says. Biden would then be able to argue that the debt ceiling and spending talks are separate. But postponing the conflict until the end of the summer could prolong uncertainty and cool the economy.
If the drama extends to within a day or two of the June 1 deadline, stocks could drop significantly and the economic impact could be similar to 2011, Zandi predicts. are doing.
- GDP will fall by more than 2 percentage points.
- Hundreds of thousands of jobs will be lost.
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What negative impact will spending cuts have on the economy?
Oxford Economics also predicts that an early deal could hurt the economy, but for different reasons. University of Oxford economist Nancy Vanden Houten said Biden would turn a mild recession into a deep recession if he agreed to cut spending by $2.4 trillion, just over half of what the Republicans are asking for. do.
What happens then?
- GDP in the second half of the year will fall by 2.3 points, not Oxford’s forecast of 1.5 points.
- Ryan Sweet, chief US economist at the University of Oxford, said an additional 460,000 jobs would be lost.
What happens when the debt ceiling is reached?
If Biden and Republicans don’t reach a deal by the deadline:
- Stocks will probably crate.
- Moody’s estimates that interest rates on mortgages, corporate bonds and other loans will soar.
If there is a short-term debt limit violation and Congress resolves it within a week, here’s what happens:
- GDP will fall by 0.7 percentage points from peak to trough.
- 1.5 million jobs will be lost.
- Moody’s estimates the unemployment rate will rise from 3.4% to nearly 5%.
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What if the debt ceiling stalemate continues for weeks or months?
Moody’s says that if debt limit violations are prolonged, “the damage to the economy will be devastating.”
- With funds drying up and credit rating agencies downgrading the Treasury’s debt, the federal government will have to cut spending.
- Banks will be reluctant to lend, and households and businesses will sharply cut back on spending and investment.
- GDP will plummet by 4.6 percentage points.
- The unemployment rate will jump to 8%.
- Moody’s estimates that 7.8 million jobs will be lost and the US will plunge into a deep recession.
Ten years from now, GDP will be almost 1 percentage point lower and 1.2 million fewer jobs, according to the research firm, compared to what it would have been without the crisis.
Contributor: Anna Kaufmann