Cecilia Routh, chairman of the White House Council of Economic Advisers, warned on October 6 that if Congress fails to raise the federal government’s debt ceiling or suspend it before the 18th of this month, the federal government will default on its debt for the first time in history. Triggered a global financial crisis.
U.S. politicians frequently staged “farce” on the debt ceiling, stimulating the nerves of the global market and highlighting the vulnerability of the world economy being “kidnapped” by U.S. debt. Tianliang U.S. debt is like a “block lake” hanging over the head of the global financial market. Once the defense is broken, the default of U.S. debt will greatly increase global financing costs and trigger financial turmoil. U.S. debt defaults will also weaken the credibility of the U.S. government and the U.S. dollar’s status as an international reserve currency. U.S. bonds and the U.S. dollar may no longer be “safe havens” for global assets.
According to statistics from the Securities Industry and Financial Markets Association of the United States, as of the second quarter of this year, the size of the U.S. Treasury bond market has exceeded 21 trillion U.S. dollars, about 29% of which are held by foreign investors, and the rest are held by the Federal Reserve, U.S. domestic banks, pension funds, and mutual funds. And other institutions and individuals hold. If U.S. Treasury bonds default, it will significantly push up the yields of Treasury bonds, triggering repricing in the capital market and financial turmoil.
In recent years, the issue of the debt ceiling has repeatedly become a political bargaining chip between the Democratic Party and the Republican Party in the United States. Although the two parties often reach an agreement before the debt default deadline, the frequent occurrence of political polarization, governance system failures, and debt ceiling deadlocks between the two parties has forced investors to take seriously the possibility of U.S. debt default.
According to the analysis of the Federal Reserve’s economic model, assuming that the federal government’s debt is “technically” defaulted for one month, the U.S. Treasury Department continues to pay interest on Treasury bonds. This will cause the U.S. 10-year Treasury bond yield to rise by 80 basis points, the stock market to fall by 30%, and the U.S. dollar to depreciate by 10%. , The U.S. economy may fall into a mild recession in the next two quarters.
In the context of the current slowdown in economic recovery and the continued spread of the new crown epidemic, the impact of U.S. debt defaults will be even greater. Research recently released by Moody’s Analytics shows that if the debt ceiling issue remains unresolved by November, the real GDP of the United States will shrink by nearly 4%, the unemployment rate will rise to nearly 9%, and the number of jobs will be reduced by nearly 6 million. Wealth has shrunk by about 15 trillion U.S. dollars. U.S. Treasury bonds will no longer be considered “risk-free assets,” and household and corporate borrowing rates will soar.
US Treasury Secretary Yellen warned that the US government debt default is likely to trigger a “historical financial crisis.” Mark Zandi, chief economist of Moody’s Analytics, said that the timely debt repayment of the US government is the cornerstone of the US economy and the global financial system. If the US debt defaults, the US and even the world economy may return to recession.
