- by cnn
- 28 Sep 2023
In CNN's town hall with Donald Trump on Wednesday, the former president said a US default on its debt may be "psychological" and that it "could be nothing" or perhaps just "a bad week or a bad day."
Economists disagree; many of them.
As the political impasse continues and the country inches closer to the day the government will no longer be able to meet all of its financial obligations, a slew of economists have released estimates on what the economic impact of a US debt default would look like. Those estimates have all been grim.
If the United States defaults on its debt, it would undermine faith in the federal government's ability to pay all its bills on time, affecting the government's credit rating and unleashing massive turbulence in financial markets.
The United States was in a similar situation in 2011 when it got close to defaulting. In that instance, S&P Global Ratings credit rating agency downgraded the government from AAA to AA+ credit rating. The federal government maintains a perfect credit rating from Fitch and Moody's, but that could change as the stalemate drags on.
Investors care about stability and predictability, so a credit rating downgrade would send a chill down Wall Street's spine. Except, some market tensions have already manifested. Yields on Treasury bills for early June, when the Treasury Department could exhaust its cash and extraordinary measures, have soared this month. Borrowing costs for credit card rates and mortgage rates would spike, since US debt serves as a critical benchmark for various forms of debt. That leaves Americans having to pay more to borrow - on top of the Federal Reserve's own rate hikes.
"Worsening expectations regarding a possible default would make significant disruptions in financial markets increasingly probable," Wendy Edelberg and Louise Sheiner of the Brookings Institution wrote in an analysis. "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."
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