Treasury Secretary Janet Yellen is warning of “economic chaos” if a deal between President Joe Biden and Republicans isn’t reached by June 1.
Virginia Tech economist Jadrian Wooten said the impact on the U.S. and globally would be significant if no deal is reached.
“We’re potentially facing significant declines in Gross Domestic Product and the potential for millions to be out of work. The long-term issue is a reduction in investor confidence in government securities,” said Wooten.
A reduction in investor confidence would raise the cost of borrowing for the U.S., which trickles down through the banking system.
“Higher borrowing costs resulting from a default or increased risk perception could further increase interest rates, making it more expensive for businesses and individuals to borrow and invest,” said Wooten. “This can dampen investment, hamper economic growth, and potentially lead to job losses.”
There are a number of obligations that the U.S. government wouldn’t be able to fully pay, like Social Security, Medicare, SNAP recipients and interest on federal debt.
“By refusing to raise the debt ceiling, we’re essentially refusing to pay what we owe people,” said Wooten.
Wooten said the U.S. dollar is the world’s primary reserve currency and any disruption in its stability and credibility could have far-reaching consequences.
“Investors worldwide hold U.S. Treasury bonds as safe assets, and a default or downgrade of U.S. debt could lead to a loss of confidence in global financial markets.”
Wooten says the U.S. is able to borrow cheaply because the U.S. dollar is in such high demand around the world but breaking that confidence could trigger international investors to seek other currencies. This in turn would raise the cost of borrowing for the U.S. making a recovery more difficult.
“It’s essential to balance the need for responsible budgeting with the requirement to meet the government’s financial obligations and ensure stability in the economy,” said Wooten. “If politicians are seriously concerned about our debt limits, those need to be addressed before the US commits to paying these obligations and not after the bill has come.”