The Economic Doomsday Scenario: Moody's Warns of Millions of Job Losses in US Default
Moody's Analytics, renowned for its financial insights, has sounded the alarm bell on a possible US debt default, predicting a grim scenario. This financial meltdown could push the United States into a severe recession, lead to the elimination of nearly 6 million jobs, and wipe out a staggering $15 trillion in household wealth.
In a bleak report, Moody's Chief Economist Mark Zandi warned that the fallout of a US default on its debt would be nothing short of catastrophic. He cautioned politicians against underestimating the gravity of the situation, stating that their complacency could lead to significant errors and dire consequences.
The potential default and ensuing economic turmoil could last for as long as four months, causing a decline in US GDP around 4%. Global financial markets would be in turmoil, with a lack of trust in US Treasury bonds potentially leading to a credit freeze.
To date, the ongoing standoff between the US government and its lawmakers over raising the debt ceiling has not triggered alarm in financial markets as much as originally anticipated. However, Zandi remains cautious, stressing that the situation warrants close attention.
The Congressional Budget Office (CBO) ascertained that if the debt ceiling is not increased, the Treasury Department could run out of cash by October, resulting in delayed payments to federal contractors, Social Security beneficiaries, and active-duty military personnel.
In the event of a prolonged crisis beyond November, severe budget cuts may become necessary to mitigate the mounting financial pressures. Such a scenario could have long-term consequences, with Americans facing the brunt of a damaged investor confidence in U.S. finances and the potential politicization of the debt crisis.
Moody's analysis highlights potential repercussions of a US debt default, including:
- GDP reduction of approximately 4%
- Stock price decline approximately 33%
- Job losses of nearly 6 million
- Financial market instability
- Credit freeze
- Devaluation of the US dollar
- Significant recession risk
- Increased borrowing costs for businesses and individuals
- Decreased consumer confidence
- Potential loss of critical government functions
Enrichment Data:
- Downgrades in credit ratings could result in increased borrowing costs for the US government and its citizens, making it more expensive to fund federal investments in areas like infrastructure, education, and healthcare.
- Perceived trustworthiness of US Treasury bonds could decline significantly, leading to a large-scale exodus of US investments by foreign investors and exacerbating financial market disruptions.
- Higher interest rates would be a direct fallout of the downgrade, making it pronouncedly more expensive for the US government to borrow funds and impacting borrowing costs for businesses and individuals.
- Economic uncertainty and volatility would ensue, directly affecting investor confidence and the equities market, potentially inducing a market downturn resembling the Great Recession.
- Global financial market disruptions could trigger a freeze in credit markets, a significant depreciation of the dollar, and an elevated rise in US interest rates.
- Recessionary risks would rise significantly, with estimates suggesting that a breach of the debt ceiling could halt around one-tenth of US economic activity and result in potential job losses.
- Impediment in the government's ability to fulfill its spending commitments, such as Social Security benefits, national defense, and public health funding, would cause economic instability and undermine critical government functions.
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