Default on debt would cost millions of jobs, wipe out trillions in wealth: research

A new analysis spells out damning effects the nation could see if the federal government defaults on the national debt, from millions of job losses to trillions in household wealth being wiped out. 

As Congress struggles to find a way to raise or suspend the debt ceiling — with Republicans digging in against doing so — a report published by Moody’s Analytics this week depicts a grim scenario the country could face as it teeters toward an unprecedented default. 

If congressional leadership fails in their race against the clock to address the debt limit, the analysis forecasted an economic downturn reminiscent of the fall of 2008. 

“A similar crisis, characterized by spiking interest rates and plunging equity prices, would be ignited. Short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well. The economic recovery would quickly be in jeopardy,” the analysis stated.

The research found, citing simulations of the Moody’s Analytics model of the nation’s economy, that the nation could lose nearly 6 million jobs. 

“That means real GDP would decline almost 4 percent peak to trough,” it said, adding that “the unemployment rate would surge back to close to 9 percent” and “stock prices would be cut almost in one-third at the worst of the selloff, wiping out $15 trillion in household wealth.” 

“Treasury yields, mortgage rates, and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume. Even then, rates never fall back to where they were previously. Since U.S. Treasury securities no longer would be risk free, future generations of Americans would pay a steep economic price,” the report states.

On Tuesday evening, the House passed a bill along party lines to suspend the debt limit and avert a government shutdown roughly a week before the current fiscal year is scheduled to end.

It now heads to the Senate, where it faces an uphill battle as Republicans have vowed to block legislation to address the debt ceiling, instead calling on Democrats to include the language in a forthcoming $3.5 trillion social spending they plan to pass without GOP support using a procedural move known as reconciliation.

However, Democrats have insisted Republicans work with them to address the debt limit, pointing to the multiple instances both parties did so under prior administrations.

“Even when President Trump was in office, Democrats worked three times with Republicans to suspend the debt ceiling, because it was the right and obvious thing to do,” Senate Majority Leader Charles Schumer (D-N.Y.) said this month.

It remains unclear exactly how long lawmakers have to address the debt ceiling.

Currently, the Treasury Department has said it’s been employing “extraordinary measures” to prevent the U.S. from defaulting on its debt.

Earlier this month, Treasury Secretary Janet Yellen said it will no longer be able to take such steps at some point in October, upping the pressure Congress to move quickly to take action.

Tags Charles Schumer debt ceiling debt default Donald Trump Government debt Government spending Janet Yellen United States debt ceiling
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