Business leaders and economists across the ideological spectrum agree that default would be catastrophic
Agreement on the catastrophic impact of default spans the ideological perspective, with business leaders and economists identifying the risks associated with default:
“Default would be a cataclysm for the global financial system. Treasuries are the foundation of the global financial system because they are perceived to have zero credit risk. Impairing this perception would raise the specter of not getting repaid which, in turn, would be an incentive to dump Treasuries. The massive dumping of Treasuries would engender a global financial meltdown.”
- Douglas Holtz-Eakin, president, American Action Forum and former chief economist of the Council of Economic Advisors under President George W. Bush in Testimony Before the Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Economic Policy (March 7, 2023)
“The specter of a federal default is an ugly one. Default raises interest rates on the federal debt, thereby worsening the country’s fiscal position. Default also raises the cost of capital throughout the economy by raising the effective floor for all interest rates, including those paid by households. To put it differently, default undercuts confidence in the world’s quintessential ‘safe asset’—the U.S. dollar—by undermining its key role as collateral in all sorts of transactions. As the former central banker Paul Tucker has pointed out, because default poses a risk to the dollar’s position as the world’s reserve currency, it weakens a geopolitical strength of the United States in its rivalry with China. Losing this dominant position would have both modest direct economic costs and, more significantly, negative consequences for the United States’ ability to collect information from and to exclude opponents from international financial networks.”
- Stan Veuger, senior fellow, American Enterprise Institute (February 21, 2023)
“Brushing up against default would have serious and adverse economic effects. It would lead to reductions in stock prices, reducing the wealth of many taxpayers. It would reduce economic confidence, which in turn could reduce consumer spending. It would increase interest rates, leaving taxpayers on the hook for billions of dollars of interest payments. And it would increase the odds of an accidental default.
On the day before a deal was reached during the 2011 debt ceiling standoff, the S&P 500 was down 6 percent from its high that year. Four days later, credit rating agency Standard & Poor’s downgraded the United States’ credit rating, sending stock prices tumbling further. At its low point during this episode, the S&P 500 lost around 15 percent of its value.
The 2011 debt ceiling standoff sent economic confidence down to levels not seen since the 2008 global financial crisis. This matters because consumers’ outlook for the economy has an effect on consumer spending. When consumers are pessimistic about the economy, they spend less, and since consumer spending is the main driver of the overall economy, consumer pessimism slows overall economic growth.”
- Michael R. Strain, director of economic policy studies, American Enterprise Institute, in Testimony Before the Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Economic Policy (March 7, 2023)
“Failing to raise the debt limit would be catastrophic. Washington would be forced to immediately balance the budget by eliminating 20 percent of all spending. Even if lawmakers could protect Social Security, Medicare, Medicaid, defense, veterans’ benefits, and interest on the debt (which together comprise 70 percent of the budget), they would have to immediately eliminate two-thirds of all remaining spending from programs such as food stamps, child nutrition, disability benefits, and homeland security. Alternatively, defaulting on the debt itself — by missing interest payments and failing to redeem bonds at maturity — could roil financial markets, destabilize bank balance sheets, and spike interest rates with cascading effects across the economy.”
- Brian Riedl, senior fellow at the Manhattan Institute, former chief economist for Sen. Rob Portman (R-OH) (February 7, 2023)
“I don’t care who blames who. Even questioning it is the wrong thing to do … That is just a part of the financial structure of the world. This is not something you should be playing games with at all.”
- Jamie Dimon, chairman and chief executive officer, JPMorgan Chase and Co. as quoted in The Guardian (January 19, 2023)
“The economic consequences of a federal default are unpredictable, but frightening. A swift and severe economic downturn could follow, with unnecessary layoffs across the economy. Chaos in world financial markets is highly likely. Higher borrowing costs for the federal government, and indeed for all Americans, could remain with us for a long time—an unwanted legacy of a foolish decision. We should not run the experiment.”
- Letter signed by more than 200 economists, including five Nobel Prize winners