It has been more than two weeks since the federal government closed many of its doors, sending roughly 800,000 employees home to wait without pay and taking a yet unknown toll on the country’s economic recovery from the Great Recession. During that timeframe, as politicians have pontificated to no end and worried consumers have prepared cash flow contingency plans, we’ve all kept one eye glued to cable news and another focused on the calendar – Thursday Oct. 17, to be specific.
That date has been looming over the debate from the jump, as it represents the time by which the U.S. Treasury will have exhausted its legal borrowing authority and will therefore no longer be able to guarantee its capacity to pay the country’s debts.
We’ve all heard how disastrous it would be for Congress not to raise the debt ceiling by then, but with all of the rhetoric and political posturing we’ve been forced to endure of late, it’s understandably difficult to differentiate fact – or at least well-reasoned likelihoods – from all of the nonsensical chatter.
So, it’s fair to wonder whether or not we should actually be concerned about this man-made crisis point. In other words, is the hype justified this time around or is this simply another case of the boys and girls in Washington crying economic wolf?
WalletHub consulted a number of leading experts in the fields of economics, banking, and public policy for answers to that very question, and the breadth of their opinions spans nearly as far as the political leanings of our country’s leaders.
False Alarm or Recession in the Making?
There is still time for Congress to figure out a funding resolution, but the dangers of not doing so are indeed real. For starters, a U.S. default would lead investors to start asking for higher rates of return on Treasury bonds, which would in turn increase the cost of consumer borrowing – from credit cards to auto loans to mortgages. At a time when the average household owes roughly $6,700 to their credit card company and student loan balances are well over $1 trillion, increased interest rates aren’t something we can really afford.
“If a solution is not found and the Treasury is unable to meet its financial obligations then I expect that interest rates on federal government debt will begin to increase more significantly. If so, it is possible that this might reduce the demand for other types of debt instruments throughout the U.S. and lead to higher interest rates throughout the economy,” said Mark C. Strazicich, a professor of economics at Appalachian State University. “If interest rates rise throughout the economy then borrowing costs would go up for many types of new loans as well credit cards, which would be expected to dampen both business and consumer spending.”
Increased consumer costs aside, a default would be potentially devastating to the United States’ reputation on the world stage, particularly as it relates to the safety of Treasury bonds as an investment vehicle.
“U.S. debt has been THE highly liquid, perfectly safe asset. If we default now, it will never again be perfectly safe,” said Richard Schmalensee, dean emeritus for the Massachusetts Institute of Technology’s Sloan School of Management. “Financial markets built on that safety will be thrown into turmoil. Will it cause another Great Recession? Perhaps. Will it be a disaster for the US and the world economy? Without doubt. This is worse than a third-world government: in third-world countries somebody with common sense and a gun would step in.”
The particularly unnerving aspect of this whole issue is the likelihood that even if we escape danger this time around, any solution that Congress implements will only be temporary and we will therefore have to revisit the underlying economic issues in a few months. By then, the stakes may have only become more significant.
“It might actually be worse the next time,” said Elisabeth D. de Fontenay, an associate professor of law at Duke Law School who studies corporate finance and financial institutions. “A short-term extension would signal that Congress continues to toy with the idea of a U.S. default and – despite all the warnings and market volatility – still doesn’t appreciate quite how serious the situation is.”
Ultimately, it seems that even those who believe not much will come of this particular debt-ceiling scare are of that opinion simply because they consider the potential ramifications of hitting the limit to be too unfathomable for politicians to allow their game of chicken to continue much longer.
“There seems to be enough public disenchantment with both political parties from this shutdown that both parties would find it in their best interest to try to resolve this without any more shocks to financial markets,” said Gordon V. Karels, the Nebraska Bankers Association College Professor of Banking at the University of Nebraska – Lincoln.
Nevertheless, we’ll just have to wait and see how things play out in the next couple of days. It will certainly be interesting, to say the least. In the meantime, if you’re interested in taking a closer look into the cystal ball of our economic future, you can check out our experts’ commentary in full below.
Ask The Experts
- Just how catastrophic would the federal government defaulting on its loans be for the economy - both in the United States and worldwide? In other words, what are politicians risking here?
- Does a short-term debt ceiling increase (as was proposed Thursday) simply mean that we will encounter the same market volatility and concern witnessed over the past few of days a month from now?
- How do you see economic policy taking shape under Janet Yellen? What is the outlook for the economy in the next 3-5 years?
- What is your take on the government shutdown, the debt ceiling debate, and the state of the U.S. economy more broadly?
- Do you think that “stimulus” is just a political buzzword that no one wants to go out and say?
- Do you think that Yellen’s policies will differ very much from Bernanke’s?
- What is your take on the government shutdown, the debt ceiling debate, and the state of the U.S. economy more broadly?
- What would happen if the U.S. were to default on its debt obligations?
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