Explainer: How could debt default impact US economy?

Moody’s Analytics cautioned that a breach of the US debt ceiling could potentially cause an economic catastrophe akin to the one that occurred in 2008, which would destroy millions of jobs and set America back for centuries.

Moody’s chief economist Mark Zandi called the impasse over extending the debt limit a “acute threat” to the country’s economy that may have a detrimental effect on almost all Americans in a new report released ahead of House hearings.

In prepared statements to be made before a Senate subcommittee hearing yesterday, Zandi stated that a default would be a catastrophic blow to the already shaky economy. The timing is terrible for the economy because many Executives and analysts already predict a recession this year, even without the threat of a debt limit breach.

According to recent economic simulations, Moody’s predicts that even a momentary breach of the debt ceiling would result in the loss of almost a million jobs and a “moderate” recession. The unemployment rate would increase from the year’s beginning, when it was at a 50-year low of 3.4%, to over 5%. The markets would crash, wiping out a significant portion of many Americans’ retirement savings.

In the paper, Zandi stated that “a TARP moment looks likely,” alluding to the late-2008 occurrence in which Congress originally failed to adopt a rescue scheme but then swiftly changed its position when the markets crashed. “A comparable crisis would be sparked, marked by rising interest rates and falling equity prices.”
The economy’s lifeblood, the short-term financial markets, would seize up as a result of that unrest.

The warning comes after Fitch Ratings told CNN on Monday that even if a default is avoided, the US credit rating might be reduced because ongoing debt ceiling disputes will increase debt relating to the US dollar and Treasury securities.


Republicans have demanded significant cuts in federal spending in exchange for increasing the debt ceiling, citing worries about America’s enormous debt load.

According to Moody’s, “severe” cuts to government spending in this case would cause the economy to lose 2.6 million jobs and push the unemployment rate up to 6%.

While they heavily rely on the government benefits eliminated in the budget cuts, lower-income households “suffer considerably more financially,” Zandi stated.

According to Moody’s, an extended breach of the debt ceiling would cause the economy to suffer a “cataclysmic” blow akin to what happened during the 2008 global financial crisis.

The economy would experience a loss of over 7 million jobs, the unemployment rate would more than double to above 8%, and family wealth would decrease by $10 trillion as equities fell by more than 20%.

Moody’s Analytics recommended legislators to refrain from playing chicken with US debt given the high stakes.

Zandi said in his prepared remarks, “Lawmakers should halt the squabbling over the debt limit and raise it with no conditions attached so future generations can enjoy the same benefits.