What the government being unable to pay the bills could mean for the U.S. economy
As President Joe Biden and congressional leaders are in a high-stakes standoff over the debt limit, experts warn it would be catastrophic if leaders do not reach an agreement in time – and launch the economy into chaos. If Congress does not raise or suspend the debt limit, the Treasury Department estimates the United States could run out of money as early as June 1, giving a divided Congress just weeks to reach a deal.
"This would be a huge hit to the economy and really an economic catastrophe," Treasury Secretary Janet Yellen told CNBC on Monday. She has warned that there is no action Mr. Biden and the Treasury can take to prevent disaster if Congress does not act.
"If Congress doesn't raise the debt ceiling, the president will have to make some decisions about what to do with the resources we do have, and there are a variety of different options, but there are no good options. Every option is a bad option," said Yellen. "The only option that really leaves our economy in good shape is — and our financial system — is raising the debt ceiling."
Amid escalating rhetoric and little progress, Federal Reserve Chairman Jerome Powell has also said Americans cannot rely on the central bank to protect them from the fallout if the U.S. defaults for the first time.
"We shouldn't even be talking about a world in which the U.S. doesn't pay its bills. It just shouldn't be a thing," Powell said. "No one should assume that the Fed can… really protect the economy and the financial system, and our reputation globally, from the damage such an event might inflict."
If the U.S. hits the X-date without lawmakers reaching an agreement, it would be uncharted territory.
"If we hit June 1, that means the Treasury will have a difficult time predicting on a daily basis if that day's tax revenues will be enough to cover that day's spending obligations," said Brian Riedl, senior fellow at think tank The Manhattan Institute.
What would the government not paying its bills mean for the economy?
There would be volatility in markets – with a lot of people seeing red. From the stock market to the bond market and the foreign exchange, markets would be roiled by the U.S. not paying even the more insignificant bills.
"The first thing that will happen is people's 401K plans will be worth less," said Mark Zandi, chief economist for Moody's Analytics. "Their wealth will be diminished by what's going on in the markets because investors are going to be discounting the possibility that lawmakers don't get together and the economy goes into recession and there will be a default on the debt."
The cost of borrowing would also go up, and the availability of credit would be lower – making it more expensive and challenging to get a personal loan, car loan or mortgage. The longer it goes on, the uglier the economic downtown would likely be, experts say.
"We could see anything from military pay, veteran benefits, Medicare provider payments, numerous other payments that would come due immediately or in the following days, some of which would be made on time or not," said Rachel Snyderman of the Bipartisan Policy Center.
The Bipartisan Policy Center estimates the U.S. could hit the X-date happen within weeks as tax receipts have been below expectations.
"There's no operation manual. It's so different from a government operating in a government shutdown scenario where agencies have a well-put-together operation plan for who goes to work, who doesn't," Snyderman said. She said government employees and vendors would be showing up for work but might not know when they're going to be paid.
Among some of the larger payments scheduled in early June are $47 billion for Medicare and $12 billion for veterans benefits, $25 billion in Social Security on June 2 and June 14, and $4 billion in federal salaries on June 9.
"One of my real concerns is with federal contractors. There are doctors who get reimbursed for seeing Medicare and Medicaid patients; defense contractors that sell parts to the federal government; small businesses that sell office supplies; there are contractors who build highways. If they're not able to get paid, they may have to lay off workers, miss mortgage payments and risk bankruptcies, which will again have a cascading effect across the economy," Riedl said. Even if prioritization of certain payments were an option, he said it does not "fool the bond markets."
Could the U.S. prioritize payments?
Treasury Secretary Janet Yellen has pushed back on the U.S. being able to prioritize paying some bills over others as a group of Republican lawmakers have proposed. She said it was still default by another name.
"You can imagine the legal challenges that would arise if the United States government is paying foreign bondholders over SNAP recipients, or getting Social Security checks out on time," said Snyderman. "There is not only the operational, economic, technical challenge, but also a severely political one as well."
But if the United States defaults on the debt itself it would amount to an economic earthquake, with interest rates jumping and stocks plunging.
"Investors would forever demand a higher interest rate to compensate for the risk that lawmakers do this to them again," said Zandi. "It would be hard to come up with how ugly that scenario is. It would be incredibly difficult for the American people."
The future of the U.S. dollar as the world's main reserve currency would certainly be threatened, said Synderman, as investors are reluctant to hold U.S. dollar-denominated assets. It would mean higher borrowing costs, lower economic influence and diminished demand. She warned against dollar instability in a time of escalating rhetoric around global competition.
And this all comes as the U.S. economy is already in a heightened state of uncertainty.
"The economy is incredibly fragile," said Zandi. "We've been through some wrenching shocks to the economy, the pandemic and the Russian war. People are on edge. Businesses are very nervous, so it's not going to take a lot to push the economy underwater, push it into recession. And this drama over the debt limit could easily be the thing that completely undermines our faith in the economy."
Does the debt limit fight itself have consequences?
Even the threat of default has economic ramifications.
During the 2011 debt limit standoff — where congressional Republicans struggled to reach a deal with the Obama administration – borrowing costs started to climb even though default was ultimately avoided. Stock market prices were down nearly 20%, and despite never actually crossing the X-date, Standard & Poor's downgraded the U.S. credit rating.
As the Biden administration and House Republicans engage in a high-stakes game of chicken over the current debt limit, the one-month yield on Treasury bonds have surged in recent days. Investors have signaled aversion to holding debt maturing around the potential X-date as there's a chance of not getting paid next month.
Last week, Treasury sold $50 billion in four-week securities that are scheduled to mature June 6 at a record 5.8% – the highest yield for any Treasury bill auction since 2000.
"This means investors are seeing the risk that is associated with securities that are maturing around the X-date and demanding higher interest rates, which results in interest costs for U.S. taxpayers in order to hold those securities," said Shai Akabas, director at the Bipartisan Policy Center. "I expect that concern will only increase as we go through the coming weeks if there is no resolution."