Though optimism is increasing that Republicans and Democrats will be able to agree on legislation to raise the debt ceiling, there is still the possibility they won’t. In that case, the U.S. government will be in default, unable to pay all of its bills.
While we’ve pointed out the impact that could have on Social Security recipients, economists say the ramifications for consumers in general and the U.S. economy would extend into many other areas. Consumers would be negatively affected on a number of fronts.
For example, people who have investment portfolios could see the value of their holdings drop sharply. As the early June deadline approaches, yields on Treasury bonds are already rising. That negatively affects current bondholders.
If you have money in a 10-year Treasury bond paying 2.5% and a default increases the rate to 5%, those 2.5% bonds are worth less, at least until maturity. Market analysts say stock prices would almost certainly go down significantly. In fact, an analysis by Moody’s Analytics says stocks could lose 33% of their value.
Housing would take a hit
The housing market, which has avoided a steep correction so far in the face of higher mortgage rates, might also be a casualty. A new report from Zillow predicts a government default could send the typical cost of a mortgage soaring by 22%. Yes, home prices might go down but mortgage rates would likely surge to 8% or higher.
"Home buyers and sellers finally have been adjusting to mortgage rates over 6% this spring, but a debt default could potentially raise borrowing costs even higher and send the market into a deep freeze," said Zillow Senior Economist Jeff Tucker. "Home values might not see a notable drop, but higher mortgage rates would severely impair affordability, for first-time buyers especially. It is critically important to find a solution and not put more strain on Americans who are striving to achieve their homeownership dreams."
Current homeowners might suddenly find it difficult to sell their homes. The Zillow analysis projects mortgage interest rates could peak at 8.4% in September in a default scenario. As a result, the housing market could freeze.
With the economic chaos unleashed by a default, the U.S. economy would slide into a steep recession. The wave of layoffs that has already hit a number of industries would only get bigger.
So why would Congress play this kind of brinksmanship with so much at stake? Good question.
Pointing to the $31 trillion national debt, Republicans in the House have passed a bill that would raise the debt ceiling but would return government spending to its level at the end of December.
Democrats have rejected that, saying the debt ceiling should be raised with no conditions and with spending decisions addressed in separate legislation.