Recession Inevitable with a Debt Ceiling Impasse?

Some of the most respected economists from both sides of the ideological divide are uniting in their assessment of what happens to the U.S. (and global) economy if the debt ceiling is not raised and the U.S. ends up defaulting on its obligations.

If the U.S. fails to make good on its obligations, the economy will sink into a severe recession, and there are no tools available to reduce an impact that could be deeper and longer than the one we just encountered in 2009. This time, the cause of the recession would not be the least mysterious – It will be laid squarely at the feet of 535 men and women in Congress.

The government has roughly 45% of the funds it needs coming in from tax revenue and other fees, and that means that 55% comes from some kind of loan. If the debt ceiling is not raised, the government is short of its needed revenue by a considerable amount. There will be a lot of people not getting paid in that event. Unlike the budget impasse, there is no exempt program.

The business community will be slammed hard by the abrupt decline in government spending, as there are 156,000 companies that currently do business with the U.S. that will be cut off. This will provoke the same reaction that took place as the fiscal cliff loomed: They will instantly stop production and start mass layoffs. Meanwhile, the whole consumer mood is crashing because of a lack of faith in the ability of political leaders to do anything at all to benefit the economic recovery.

No nation will have ever allowed itself to slide into default with the ability to avoid it so close at hand. If the members of Congress are unable to reach consensus, the U.S. economy will suffer damage, and there will be a recession that could rival that of the 1930s in a worst case scenario. It is also entirely possible that the downturn would be milder than that. The question is whether such a catastrophe should be risked at all when such a risk is entirely avoidable.

- Chris Kuehl, PhD, Armada Corporate Intelligence

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