Economists warn of potential global financial crisis if US defaults on debt

"A default would have serious and protracted financial and economic effects. Financial markets would lose faith in the US, the dollar would weaken, and stocks would fall," economists at the White House Council of Economic Advisers led by Cecilia Rouse said in a blog post published on Wednesday.

"The US credit rating would almost certainly be downgraded, and interest rates would broadly rise for many consumer loans," the economists said, adding these and other consequences could trigger an economic recession in the country.

Meanwhile, the global economy, which relies on a strong US economy, could begin to slide into a financial crisis and a recession, as the consequences of an American default could accelerate rapidly if not resolved, they noted.

"A default would send shock waves through global financial markets and would likely cause credit markets worldwide to freeze up and stock markets to plunge. Employers around the world would likely have to begin laying off workers," said the economists.

Noting that the 2008 financial crisis had ripple effects throughout the global economy that ricocheted back to US shores, they believe that a global financial crisis driven by a US default "has the potential to be even worse", as the global economy has not fully recovered from the Covid-19 pandemic.

"The debt ceiling is not and should not be used as a political football. The consequences are too great," the economists concluded.

The warning from the White House economists came after Treasury Secretary Janet Yellen said on Tuesday that she fully expected the economy to fall into a recession if Congress failed to raise the debt limit.

Yellen told lawmakers that they have to raise or suspend the debt limit by October 18 when the Treasury Department is likely to exhaust its "extraordinary measures".

As part of a bipartisan budget deal enacted in August 2019, Congress suspended the debt limit through July 31.

After the debt limit was reinstated on August 1, the Treasury Department began using "extraordinary measures" to continue to finance the government on a temporary basis.

The debt limit, commonly called the debt ceiling, is the total amount of money that the US government is authorized to borrow to meet its existing legal obligations, including social security and medicare benefits, interest on the national debt, and other payments.