Mark Zandi, chief economist at Moody’s Analytics, warned of a “catastrophic” fallout that Congress has weeks to avoid if it cannot come to an agreement on whether to raise how much the US Government can borrow.
While the report notes that shutting down the government would not immediately cause a recession, estimates of the previous 2018-2019 government shutdown put the cost to the US economy at $11bn. The true danger to the economy comes when the Treasury exhausts its funds and defaults on its debt, which the report states would happen around 20 October.
If the limit is not lifted by mid-October, the economist predicts gross domestic product falling by nearly 4%, with the unemployment rate rising from 5% to 9%. Stock prices would crash by about one-third during the worst of the sell-off.
“If lawmakers are unable to increase or suspend the debt limit … the resulting chaos in global financial markets will be difficult to bear,” the study said, adding the USA and global economy “still have a long way to go to recover” from the coronavirus pandemic.
While the US House of Representatives passed a bill yesterday to avert the shutdown, the Senate has not yet reached an agreement. Senate minority leader Mitch McConnell has ignored warnings from senior Democrats over the financial consequences of a shutdown, taking to the floor yesterday to attack Democrat’s “reckless taxing-and-spending spree” while not directly addressing the debt limit.
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