Debt Ceiling Standoff Puts Social Security Payments, Investments at Risk

What’s worse: A government shutdown or a failure to raise the debt limit? A shutdown sounds more serious, but failing to raise the debt limit would mean the first U.S. government debt default in history, with all the complications that brings.

“The federal government would have to significantly cut back spending, [which] would probably mean delaying about $80 billion in payments due November 1 to Social Security recipients, veterans, and active-duty military for as long as two weeks,” writes Mark Zandi, chief economist at Moody’s Analytics, in a new report.

“Financial markets would surely be roiled” with spiking interest rates and plunging equity prices. Global investors would sell or stop buying U.S. debt, and the Federal Reserve would have to shore up purchases of Treasury bonds, according to Zandi.

If the impasse lasted through all of November, writes Zandi, the Treasury would have to eliminate a cash deficit of about $200 billion, which would be equivalent to a cutback that would top 10 percent of GDP on an annualized basis. “This economic scenario is cataclysmic.”

Simulations by Moody’s Analytics of a U.S. government default show gross domestic product (GDP) declining by almost 5 percent from peak to trough on an inflation-adjusted basis, as well as 6 million jobs lost and unemployment spiking to nearly 9 percent.

Treasury Secretary Janet Yellen is very concerned. In a recent op-ed in the Wall Street Journal, she warned that “nearly 50 million seniors could stop receiving Social Security checks for a time, troops could go unpaid,“ millions of families who rely on the monthly child tax credit could see delays, and “the current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost. …

“The higher cost of borrowing would fall on consumers. Mortgage payments, car loans, credit card bills—everything that is purchased with credit would be costlier after default.”

Waiting for Congress

So, what is Congress doing to avoid such a default?

Last week, the House of Representatives passed legislation to keep the government funded through early December and lift the limit on federal borrowing through the end of 2022, but no Republicans voted for the legislation. In the Senate, Republican Minority Leader Mitch McConnell, R-Ky., said Republicans “will not support legislation that raises the debt limit.” That leaves it up to Democrats, who had hoped for a bi-partisan vote, to keep the government funded and lift the debt ceiling.

Democrats could try to raise the debt ceiling as part of a reconciliation bill, which is still pending due to differences between moderate and progressive Democrats, but that could be complicated.

First, it’s not clear the Senate parliamentarian would go along with that approach. And second, even if she did, there would be multiple procedures that Democrats would have to follow first, which takes time and could find them bumping up against a looming deadline. Yellen estimates the deadline, after which the Treasury would begin defaulting on debt, to be “sometime in October.” The Bipartisan Policy Center says the deadline will likely fall between October 15 and November 4.

Greg Valliere, chief U.S. policy strategist at AGF Investments, says the reconciliation approach could be “tricky” because moderate Democratic senators Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, who so far oppose Biden’s $3.5 trillion spending plan, could oppose that approach.

He added that investors shouldn’t worry about the debt ceiling impasse for several weeks, and it appears investors are not currently concerned. But that means that if the worst case scenario happens—and the debt ceiling is not raised—the impact will be dramatic.

From: ThinkAdvisor