Economists from Moody's Analytics, part of the sister company of the Moody's bond rating agency, recently released a series of economic forecasts based on possible U.S. debt ceiling outcomes:
"The debt limit was hit on January 19, and the Treasury is now using “extraordinary measures” to come up with the additional cash needed to pay its bills. Based on our assessment of the government’s outlays and receipts in coming weeks, those measures seem likely to be exhausted by mid-August. To be more precise, the X-date appears to be August 18. That is a few days after the Treasury will have made a scheduled interest payment to Treasury bondholders. Investors in short-term Treasury securities are coalescing around a similar X-date, demanding higher yields on securities that mature just after the date given worries that a debt limit breach may occur.
"Unless the debt limit is increased, suspended, or done away with by then, someone will not get paid in a timely way. The U.S. government will default on its obligations. In this analysis, a default occurs when the Treasury fails to make good on any of its obligations in full or on time, regardless of whether it is to bondholders, Social Security beneficiaries, defense contractors, or others.
"The original intent of the debt limit was to force lawmakers to be fiscally disciplined—to raise taxes or restrain government spending sufficiently to keep the government’s deficits in check and its debt load low and stable. It has failed at this. Instead, the debt limit has become highly disruptive to the fiscal process, resulting in unproductive political brinkmanship that has unnerved financial markets, businesses and households.
"The current battle over the debt limit looks to be even more vexed than in times past. Odds that lawmakers are unable to resolve their differences and avoid a breach of the debt limit appear meaningfully greater than zero."
The paper then lays out five scenarios with associated risks and economic impacts: Clean Debt Limit Increase, Constitutional Crisis, Payment Prioritization, House Republican Plan, and Prolonged Breach. www.moodysanalytics.com/-/media/article/2023/going-down-the-debt-limit-rabbit-hole.pdf
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