Stock market to plunge 33% if government defaults: Moody’s
President Joe Biden very often quotes Moody’s research when trying to take stock of the US economy.
He should use the latest news from Moody’s Mark Zandi to highlight any points raised with fellow politicians on both sides of the aisle about the need to reach a debt ceiling deal as soon as possible.
“Closing the government would not be an immediate blow to the economy, but a default would be a catastrophic blow to the nascent economic recovery following the COVID-19 pandemic,” said Zandi, the widely followed chief economist of Moody’s – which rose to fame for premonitory appeals before and during the Great Recession – in new research.
The blow of a default on our debt due to the failure of lawmakers to extend the debt ceiling would be particularly severe for stock investors, according to Zandi.
“Stock prices would be cut by nearly a third at the worst of the liquidation, wiping out $ 15 trillion in household wealth. Treasury yields, mortgage rates and other consumer lending rates and companies climb, at least until the debt limit is resolved and Treasury payments resume. Even then, rates never fall back to where they were before. more safely, future generations of Americans would pay a high economic price, ”Zandi said, referring to the potential fallout in asset markets.
In large part, the market pressure would reflect the major economic blow caused by the default on debt.
Zandi explains, “The blow to consumer, business and investor confidence would be severe. If the debt limit deadlock lasts through November, the Treasury will have no choice but to eliminate a cash deficit of about $ 200 billion by cutting government spending. On an annualized basis, this equates to more than 10% of GDP. The economic blow would be devastating. “
Zandi’s dire predictions follow Treasury Secretary Janet Yellen’s warning of “catastrophe” if the debt ceiling debate is not resolved.
“The United States has never defaulted. Not once. It would likely precipitate a historic financial crisis that would worsen the damage from the lingering public health emergency. The default could trigger a surge in interest rates, a Sharp drop in stock prices and other financial turmoil Our current economic recovery would turn into a recession, with billions of dollars in growth and millions of jobs lost, ”Yellen said in a Wall Street Journal op-ed.
As it stands, lawmakers remain locked in a controversial battle over the issue.
On Tuesday, the Democratic-led House passed a short-term government funding bill that maintains funding until December 3. It also includes a provision to suspend the debt ceiling until December 16, 2022.
But, the bill is likely to die on the floor of the Republican-controlled Senate.
Brian Sozzi is an editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, Youtube, and reddit