As Congress continues negotiations on the federal debt ceiling, Michigan State University experts can comment on the impacts of a potential default.
Charley Ballard is a professor of economics in the MSU College of Social Science. Ballard can discuss what a federal default could mean for the U.S. economy at large.
“If the U.S. were actually to default, the results could be catastrophic. Other people around the world will rethink investing into the U.S. If we fail to do something, people could see higher interest rates on credit cards and mortgages. A default would likely lead to all sorts of problems in the financial services sector. More banks would fail, bank lending would be severely curtailed and unemployment would rise.”
Antonio Doblas-Madrid, associate professor of economics in the MSU College of Social Science, can speak about the potential impact to the global economy should the U.S. default.
“To uninformed ears, refusing to raise the debt ceiling may sound fiscally responsible. Unfortunately, it is the opposite. It is reckless. It means blocking the U.S. Treasury’s access to funds needed to pay bills due now for expenses approved in the past. This would cause chaos and damage the country’s financial reputation. It should be unthinkable.”
“The United States is one of a group of privileged countries that has always had healthy enough finances that it has never defaulted on its debt. And the U.S. dollar is the world’s reserve currency. It’s shocking that this debt ceiling situation that keeps coming up over and over threatens to engineer a self-inflicted financial crisis.”
Stephen Schiestel, Frederick S. Addy Professor of Practice in finance in the MSU Broad College of Business, can discuss the effects of a default for stock markets and business.
“Defaulting would be an unprecedented event in the U.S., so we don’t have any history to guide us. At this point, the market is telegraphing that a settlement will be reached. However, if it becomes more certain that an agreement can’t be worked out and that a default would occur, the markets will react negatively very quickly before the actual default occurs. We would see U.S. Treasury securities sell off (and rates rise) and stocks trade down on the news.”
“Since U.S. Treasury securities are viewed worldwide as a ‘risk free’ asset, it is uncertain what the ultimate impact of default would be in the global capital markets. The hope is that both Republicans and Democrats take this very seriously and arrive at an agreement as soon as possible.”
Andrei Simonov is the Philip J. May Endowed Professor in Finance at MSU and chair of the Department of Finance in the Broad College of Business. He can speak about a potential default’s impact on the global financial system and why it would be detrimental to the government’s efforts to curb inflation.
“There is a deep belief that the United States can never default on its obligations. It is based on history: the U.S. has never defaulted. This belief also comes from the fact that all U.S. debt is denominated in the U.S. dollar, which is not the case in many other countries. It’s further enhanced by global perceptions of the U.S. as a leader in the world’s financial system over the last 80 years.”
“What will happen if the U.S. goes into the ‘technical default’ on June 1? Most likely, the yield on the U.S. Treasury will spike, and the cost of borrowing will go up permanently, probably by 0.5-1%. I do not think that it will significantly erode the role of U.S. Treasuries or the U.S. dollar in the world financial system for the short and medium term. However, it stimulates some players, such as state-owned investment funds and foreign countries, to look for alternatives. The long-term trust depends on controlling debt and lowering it from the current 110-120% of GDP to below 90%. A default will also make the Federal Reserve’s work to fight inflation even more difficult, as it probably forces the Fed to lower rates when inflation is still stubbornly high.”