From Breakingviews - Debt crisis is a scary white swan for US economy
The U.S. Capitol building exterior is seen at sunset as members of the Senate participate in the first day of the impeachment trial of President Donald Trump in Washington, U.S., January 21, 2020. REUTERS/Sarah Silbiger.. That will be President Joe Biden’s first major test since announcing his run for a second term in the White House today.
Reaching that deadline without a congressional fix would lead to a calamitous default. The Treasury would be prevented from issuing debt to fund the nation’s needs. That, in turn, would force the government to dramatically cut spending to erase its $350 billion budget deficit. Those cuts would, in just one year, shrink the economy by 4% and eliminate some 7 million jobs, lifting the unemployment rate to 8% from today’s 3.5%, according to Moody’s.
, a measure of market shakiness, tripled. Corporate borrowing costs surged as investors fled to safer assets. And for the first time in history, a credit rating agency – S&P Global – downgraded the U.S. government’s debt.A similar, albeit less harmful, episode came two years later. Without those two debt standoffs, the U.S. economy would have been $180 billion bigger by 2015, according to Moody’s. The unemployment rate would’ve been 0.7% lower.
The U.S. dollar also derives much of its value from its perceived stability. Growing fears of a debt crisis could lead markets around the globe to question the safety of the greenback. Currencies like the Swiss franc and the euro could strengthen against the dollar as investors and central banks park their cash elsewhere.
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