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- The deadline for the US debt ceiling agreement is approaching.
- A default on government debt would result in economic disaster, but even the uncertainty ahead of the deadline could trigger economic collapse.
- The debt ceiling debate in 2011 is an example of a near miss that momentarily shook the economy.
As negotiations to raise the debt ceiling intensify, experts are warning of economic catastrophes that could result from a US default.
However, as the June 1 deadline nears, the anticipation could itself have economically disastrous consequences. And there is already a precedent for that.
In 2011, a similar battle over the debt ceiling ensued: then-House Speaker John Boehner rallied Republicans behind a spending bill that would combine a debt ceiling hike with spending cuts on jobs, health care and education programs. After months of heated disagreements, MPs agreed on a compromise of raising the debt ceiling and cutting spending. Total catastrophe was avoided, but the back-and-forth shook the economy.
According to a 2013 US Treasury Department analysis, the prospect of a debt default caused stock prices and consumer confidence to fall sharply. Household wealth fell by $2.4 million that year and taxpayers had to accept higher interest payments.
Standard & Poor’s also downgraded the US credit rating after the debt ceiling agreement, calling the negotiations a sign that US “government and policy making” had become “less stable, less effective and less predictable”. This also had an impact on share prices.
A similar situation could arise leading up to the “X-date” — or the standard deadline — experts at the New York Times said. However, Randall S. Kroszner, an economist at the University of Chicago, told the Times that economic pressures could play out differently in 2023 than they did in 2011, when the economy was on firmer footing.
“2011 was a very different situation – we were in recovery mode from the global financial crisis,” Kroszner told the Times. “In the current situation, where the banking system is very fragile, you take a higher risk. You pile fragility on top of fragility.”
The most obvious result of the financial chaos: Economic pressures could lead to a rise in interest rates, driving up monthly payments on everything from student loans to credit cards.
However, pundits told the Times that is not the case, at least not yet.
In late April, Republicans in the House of Representatives passed Speaker Kevin McCarthy’s bill, the Limit, Grow, Save Act of 2023, which would raise the debt ceiling by $1.5 trillion while cutting $4.5 in spending on programs how would implement student loan forgiveness.
Earlier this month, a report by Moody’s Analytics found that Republicans’ proposed spending cuts “could trigger a recession in 2024 that will cost the economy 2.6 million jobs in the worst-case scenario of the downturn and push unemployment to a peak of nearly 6 % might drift”.
And as in 2011, Republicans and Democrats are extremely hesitant about raising the debt ceiling — with the U.S.’s ability to borrow money to meet its current legal obligations (read: no new spending) coming under renewed scrutiny from the Republican Party was tied to new issues .
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