Washington, D.C. – It is extremely difficult to construct a credible scenario in which the United States hits the debt ceiling on October 17 without inflicting major damage to the U.S. and world economies, according to a new report released today by the Center for American Progress. According to the analysis, at best, a default that lasts only hours and increases the risk premium on U.S. debt by even a small amount would still cost taxpayers hundreds of billions of dollars over the next decade. More likely, any larger amount of time the United States spends in arrears will harm the real economy and may well disrupt financial markets.
“Failing to raise the debt ceiling would be dangerous and irresponsible. Without question, the effect of the GOP’s inaction would destabilize our nation’s economic recovery, put at risk the financial well-being of American families, and threaten the global financial system,” said Neera Tanden, President of the Center for American Progress. “Nothing could create greater uncertainty, indeed threaten economic havoc, than playing around with raising the debt ceiling.”
CAP economist and author of the report, Michael Madowitz, explains that the effects of a U.S. government debt default will largely depend on how soon the House of Representatives ends its fiscal brinksmanship. As the 2011 debt-ceiling standoff showed, the effects of a potential default will not wait until the Treasury deadline of October 17, and the 2008 financial crisis proved it is extremely difficult to predict what will break in the financial system until it has broken.
With that in mind, Madowitz examines two basic scenarios of a U.S. default: one in which the debt ceiling results in a default for only a short time—say, less than one business day—and one in which the United States is unable to borrow for a longer period. In either case, a failure to lift the debt ceiling in a timely manner will result in:
- Significantly increased interest costs on the national debt
- Long-term negative impacts for the U.S. economy
- Real, tangible, and costly consequences for everyday Americans
- Severe, unpredictable consequences for the U.S. and the world financial system
- Macroeconomic consequences that increase with each day the debt ceiling restrains activity
- An immense amount of unpredictable downside risk to the U.S. economy
It is difficult to understate the amount of risk involved in failing to raise the debt ceiling—not because it is challenging to estimate the cost of each individual consequence, but because it is so difficult to conceive all of the relevant consequences. Due to the vast uncertainty about possible outcomes, this issue brief likely understates the nature of the risks involved.
Read the report: What Should We Expect if the United States Defaults? by Michael Madowitz
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