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Deep Recession & Financial Chaos: “Very Dark Scenario” If Debt Ceiling Isn’t Raised, Zandi Says

Aaron Task
Daily Ticker

The Fourth of July holiday weekend is upon us and many Americans are already going into vacation-mode. But in Congress, there will be no break from the debt ceiling negotiations as Senate Majority Leader Harry Reid has canceled the Senate's July 4 recess.

Reid's announcement followed President Obama's call Wednesday for Congress to "cancel things and stay here" until "substantial progress" is made on the debt ceiling.

Republicans, in turn, took exception to the president's comments, which were described as scolding and patronizing.

"The president doesn't seem to get it," said Senate Minority Leader Mitch McConnell, who responded by inviting Obama to come to the Capitol and meet with GOP legislators. "That way he can hear directly from Republicans why what he's proposing won't pass." McConnell said. "And we can start talking about what's actually possible."

White House spokesman Jay Carney dismissed McConnell's call for a meeting as "not a conversation worth having," Politico reports.

Two weeks ago a golf outing with President Obama and House Speaker John Boehner seemed to produce some momentum toward an agreement. (See: Driving for a Debt-Ceiling Deal: Good Vibes Follow Obama-Boehner Golf Outing)

But any good vibes seem to have dissipated as the calendar creeps toward the Aug. 2 deadline set by Treasury Secretary Tim Geithner. (See: Battle Lines Harden as Obama Joins Debt Ceiling Debate

The GOP and Democrats are "very far apart politically [but] closer than people think in terms of the substance of the debate," says Mark Zandi, chief economist at Moody's Analytics. "There's widespread agreement in terms of the magnitude of deficit reduction that's needed and general agreement on the contours of what needs to be done."

As a result, Zandi is "counting on" Congress to come up with some agreement before the Aug. 2 deadline, believing there's enough room for compromise for at least a temporary agreement to raise the debt ceiling.

But "I don't think it'll be painless," he says. Congress will "probably need a push from the financial markets to sign on the bottom line" and something much more dramatic than the recent selloff in the Treasury market, he says. "It will get uncomfortable before they actually do it but I think they'll do it before it becomes a real problem."

Zandi is among the many economists who believe failure to raise the debt ceiling by Aug. 2 would trigger a "very dark scenario." He also dismissed the idea, suggested here by Chris Whalen among others, the government can go past the deadline without any major ramifications.

"If we have to cut Social Security recipient checks and Medicare and everything else the Federal government does, the economy will get pushed into recession," he says. As an investor, "I'm not taking any solace I'm getting paid at that moment in time [because] in my mind the odds of me getting paid in the future are lower."

Indeed, the rating agencies have warned failure to raise the debt ceiling by Aug. 2 will result in a downgrade of America's triple-A rating, which would suggest less likelihood of bondholder being paid in full.

In addition, a new recession would come at an "enormous cost" to taxpayers because of the need for additional payments on unemployment benefits, food stamps and other social safety net programs; along with decreased tax revenue due to less economic activity, that would result in even higher long-term deficits, leaving Zandi to wonder: "As a global investor do I really want to hold the stocks and bonds of country in a deep recession?"

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com

For additional coverage of the debt ceiling debate, see:

U.S. Hits the Debt Ceiling: What Does It All Mean?

Debt Ceiling Deadline Pushed Back: Will the GOP Budge?

Rep. Levin: GOP "Playing With Fire" On Debt Ceiling Vote

Debt Ceiling Vote a "Political Sideshow", Mish Says: Real Issue Is "Govt. Spending Run Amok"

"No Downside" to Not Raising the Debt Ceiling, Says Chris Whalen

Debt Ceiling Debate: The GOP Is "Blackmailing the American People," Sen. Bernie Sanders Says

Debt Ceiling Uncertainty: Big Banks Take Evasive Action, The FT Says

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