debt-started to increase dramatically in April, as demonstrated by Figure 2 below. In fact, credit default swap (CDS) spreads-the insurance premiums that must be paid to insure U.S. debt has also risen substantially and is now at an all-time high, reflecting increased worries about a U.S.
Figure 1 below demonstrates this since the middle of April, yields on short-duration Treasury bills around the expected X-date have increased by nearly 1 percentage point, or roughly 20 percent. Yields on Treasury bills with maturity dates around the X-date have increased considerably-directly increasing the cost of borrowing for the government and thus the cost to taxpayers. In fact, we have already seen evidence of significant market stress correlated with debt ceiling tensions. Nevertheless, there is broad consensus amongst economists that such an event would generate an entirely-avoidable economic catastrophe.įor example, Brookings Institution analysts Wendy Edelberg and Louise Sheiner recently argued that “Worsening expectations regarding a possible default would make significant disruptions in financial markets increasingly probable” and that “such financial market disruptions would very likely be coupled with declines in the price of equities, a loss of consumer and business confidence, and a contraction in access to private credit markets.” government passing the X-date and breaching its debt ceiling without Congress raising or suspending the statutory limit on federal debt. There is no historical precedent for the U.S. Potential impacts of approaching the debt ceiling The risks engendered by the default would cause interest rates to skyrocket, including those on the financial instruments that households and businesses use-Treasury bonds, mortgages, and credit card interest rates. The ability of households and businesses, especially small businesses, to borrow through the private sector to offset this economic pain would also be compromised. In other words, defaulting on our government’s debt could reverse the historic economic gains that have been achieved since the president took office: an unemployment rate near a 50-year low, the creation of 12.6 million jobs, and robust consumer spending that has consistently powered a solid, reliable growth engine, supported by paychecks from the strong job market and healthy household balance sheets.īecause the government would be unable to enact counter-cyclical measures in a breach-induced recession, there would be limited policy options to help buffer the impact on households and businesses. Table 1: Estimated Economic Effects of Debt Ceiling Standoff: Q3 2023
A protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions. government were to default on its obligations-whether to creditors, contractors, or citizens-the economy would quickly shift into reverse, with the depth of the losses a function of how long the breach lasted. Analysis by CEA and outside researchers illustrates that if the U.S. debt ceiling would likely cause severe damage to the U.S.
Real time data, shown below, indicate that markets are already pricing in political brinkmanship related to Federal government default through higher risk premia.Īn actual breach of the U.S. debt ceiling could cause significant disruptions to financial markets that would damage the economic conditions faced by households and businesses. Department of the Treasury suggest the United States is rapidly approaching the date at which the government can no longer pay its bills, also known as the “X-date.” History is clear that even getting close to a breach of the U.S. New analyses by both the Congressional Budget Office and the U.S. Get Involved Show submenu for “Get Involved””.The White House Show submenu for “The White House””.Office of the United States Trade Representative.Office of Science and Technology Policy.Executive Offices Show submenu for “Executive Offices””.
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