Debt ceiling has 'proven to be an ineffective tool in curtailing federal spending': Analyst
Bankrate Senior Economic Analyst Mark Hamrick joins Yahoo Finance Live to discuss how a U.S. debt default could impact Americans' finances and the stock market, which would have the potential to send the economy into a recession.
Video Transcript
- The clock is ticking for Congress to raise the debt ceiling. If they fail to do so by the time the US reaches the X date, the date the government can no longer pay its bills, it could have dire consequences, not just for the government, but for Americans, for you as a whole. So let's talk about it with Mark Hamrick. He's senior economic analyst at Bankrate. Mark, it's good to see you here. So there's a number of ways that it could affect our viewers. Let's just start with more, broadly speaking, when it comes to the equity markets, how big of a hit could some people's investments take?
MARK HAMRICK: No doubt a huge one, Seana. It's good to see you again. I think we've had some experience with this in the past where the stock market took a dive even approaching the X date, where it was resolved in 2011. Obviously, eventually recovered those losses. But I want to caution people in the sense of thinking that this is all very quantifiable because we're really talking about the equivalent of a disaster the likes of which we've not had in the United States in our history.
We had the loss of nearly 15 million jobs in March and April of 2020. That was a disaster. We had the Great Financial Crisis. That was a disaster of another kind. And we're really talking here about a huge hit to the macro and micro economies, meaning we'd have a seizing up of financial markets and the financial system. We'd have a lot of people who are due money, whether it's individuals or businesses, that they would not be paid.
And so I think there's an analogy here where we thought about going into the weekend of the Silicon Valley Bank failure, we were worried about one significant bank not being able to essentially function because the big worry was that businesses wouldn't be able to make payroll, and that would be sort of rumbling all across the US economy. Now, multiply that by a factor that we, frankly, don't know what the number is, but many, many times over. And that's really the kind of thing we're talking about.
And finally, to the point that you didn't ask about, this is all would be self-inflicted and unnecessary because, if anything, the debt ceiling has proven time and time again to be an ineffective tool in curtailing federal spending. So it does not inflict fiscal responsibility upon lawmakers. It just gives us another thing to worry about.
- Mark, you talk about money owed there and what this means if we hit that June 1 date. 66 million retirees out there who are saying, well, what about Social Security? What can they expect?
MARK HAMRICK: Well, I think it's not entirely clear what happens to them. I've seen answers on both sides of that equation. But let's just say that if Social Security recipients were not able to get their money, think about all the horrible consequences that would emerge from that, whether it's food insecurity, inability to get health care, and indeed the health benefits that those people get could be interrupted as well. So, again, if you want to inflict a great deal of damage on the American populace, this would be a very effective way of doing it.
- Mark, is that the same for federal employees, and also veterans' benefits? Would they still would they be in the same boat as Social Security and Medicare, it sounds like?
MARK HAMRICK: Yeah. Yeah. We believe so. I've have also seen some differentiation on the payment of benefits to members of the military, that that may have some way of being carved out and protected. But nevertheless, all these cohorts that we're talking about end up being any one of them alone is significant. But let's think also just about the fact that the federal government works with business across the spectrum.
And we're having problems in downtown Washington, DC just with the lack of return to office. Imagine if the federal government just stopped paying everyone that it was due to pay money to, and then sort of carry that out all across the globe. So again, totally unavoidable, totally unnecessary, and potentially very catastrophic.
- And Mark, we're talking about the worst case scenario here where the US defaults on its debt. There's certainly a lot of analysts out there who say, we don't think it's going to come to that. Certainly, the president doesn't want to have that happen on his watch. But what if we just go up to that line? If we're talking at the end of May that no deal has still been reached, June 1 hasn't come yet, but what does that mean? I mean, can you talk about, the more likely scenario?
MARK HAMRICK: Well, I don't know what the most likely scenario is. If I did, I'd say that. I would say right now I'm betting that the most likely scenario is we engage in one of our national sports here, and that is kick the can once again because that seems to be perhaps the simplest solution when people are trying to add some complexity to this but also need a way out. In the negotiation process, essentially, you need a situation not unlike Russia and Ukraine, where both sides needs to walk away with some degree of at least their own perceived respectability, including among constituents.
But to your point, that eventuality could be very much damaging as well because you may have some damage or declines in financial markets with respect to asset prices. You could have some distortions in fixed income like we had with the raising of borrowing costs to the tune of a billion dollars with respect to the federal government in the 2011 instance. So you might say that are some not so worst case scenarios that are still quite bad.
- Mark, you briefly touched on this earlier here, but when we talk about the cost of borrowing going up, more specifically, what does it mean for Americans who have a mortgage or those who have credit card debt? How much more could they potentially pay as a result?
MARK HAMRICK: It's impossible to quantify that. But what I would say is we just had the Senior Loan Officer Survey out from the Federal Reserve a few hours ago. And that already found that there's less availability of credit right now, and also less demand for it. And this would be a much more severe severing of that availability in this eventuality of, let's say, breaching the X date.
We're already seeing distortions in the financial markets. And we're not anywhere there yet. And to the point of the earlier segment on this, we also don't have a high degree of confidence what the actual X date is. But we do know that with slowing economic activity, there's less revenue coming in to the federal government. And that's one of the ways that we pay our bills when we're not borrowing.
So what I think is that we're really dealing with a lot of unknowns here, a lot of uncertainty. And uncertainty is something that is really the antithesis of confidence. And we need confidence on the part of consumers and businesses. And right now, if you want to look at, let's say, the major source of uncertainty in the very near term, it is this debt ceiling issue. We have plenty of other sources as well that aren't quite necessarily as pressing that we know of.
- Mark Hamrick, senior economic analyst over at Bankrate, it's good to talk to you today. I appreciate the time.
