Debt default would cost 6 million jobs, push jobless rate to 7 percent: analysis

Janet Yellen
FILE – Treasury Secretary Janet Yellen speaks with reporters during a visit to the Virginia Innovation Partnership Corporation incubator at the Center for Innovative Technology campus in Herndon, Va., Oct. 21, 2022.  Yellen has notified Congress that the U.S. is projected to reach its debt limit on Thursday and will then resort to “extraordinary measures” to avoid default. (AP Photo/Cliff Owen, File)

The U.S. economy could suffer an economic hit comparable to the 2007-08 financial crisis and recession if the federal government defaulted on its debt, according to an analysis released Monday.

Mark Zandi, chief economist for Moody’s Analytics, estimated that the U.S. would lose 6 million jobs, $12 trillion in household wealth and 4 percent of gross domestic product (GDP) if Congress and the White House fail to raise the federal debt limit before the U.S. runs out of cash. The unemployment rate would also rise to at least 7 percent, up from the December 2022 rate of 3.5 percent.

While a brief default would likely be enough on its own to cause a recession, Zandi warned, a protracted standoff over the debt ceiling would be ruinous for a vulnerable U.S. economy.

“If policymakers actually do fail to increase or suspend the limit before the Treasury runs out of cash and defaults on its obligations, interest rates will spike, and stock prices will crater with enormous costs to taxpayers and the economy,” Zandi wrote. He compared the initial financial market reaction to the House’s 2008 vote against passage of the Troubled Asset Relief Program (TARP), which deepened the financial crisis already roiling global markets.

“If lawmakers do not reverse course and the impasse drags on for even a few weeks, the hit to the economy would be cataclysmic,” Zandi wrote.

Zandi’s stark warning comes just days after the federal government hit the $31.4 trillion cap on the national debt imposed in bipartisan agreement last year. The federal government is now banned by law from borrowing more money through the issuance of Treasury bonds and must pay its bills with cash already on hand.

Treasury Secretary Janet Yellen did not specify when the department would exhaust the “extraordinary measures” it uses to avoid a default, which she warned in a Thursday letter “is subject to considerable uncertainty.” But fiscal experts say the federal government likely has until June before Congress and the White House must reach a deal to raise the debt ceiling.

Breaching the debt limit would force the federal government to freeze all planned spending, which would sap billions of dollars from the U.S. economy and interrupt federal benefit payments. Financial markets would also crater amid concerns about the reliability of the federal government and the trillions of U.S. dollars held across the world as safe assets.

Congress and the White House would also be unable to approve any fiscal support for the U.S. economy while the debt limit was breached, and Zandi said the Federal Reserve would have limited power to help staunch the bleeding.

“Any benefit would likely be overwhelmed as global investors sold or stopped buying U.S. securities,” Zandi wrote.

Lawmakers have struck debt ceiling deals within days of a potential default in past showdowns, and Zandi said it is still unlikely the U.S. actually default this year. Even so, he warned that the specter of a default and the choppiness that will create in financial markets is still dangerous to a weakening U.S. economy.

“The timing could not be worse for the economy,” Zandi wrote.

“With the Federal Reserve ramping up interest rates in an effort to quell wage and price pressures, avoiding a recession would be difficult even if nothing else went wrong.”

Tags Janet Yellen Mark Zandi

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