If Congress fails to approve an increase in the debt limit, the consequences will be much more severe for the economy than if we had jumped off the fiscal cliff, including a swift descent into recession, says Alan Blinder, former vice chairman of the Federal Reserve.
If Congress had punted on the cliff, the result would have been a loss of about 4.5 percent of gross domestic product (GDP), he estimates in an article for The Wall Street Journal. A debt ceiling stalemate would subtract more than 6 percent of GDP.
A debt ceiling breach would mean an immediate 26 percent reduction in government outlays, says Blinder, now a Princeton University economist. “How in the world could the government cut so much spending so quickly? No one really knows.”
Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did
One sure result would be “a swift descent into recession,” he states. “Another will almost certainly be a second ratings downgrade and higher borrowing costs for years, maybe decades.”
Bottom line: “the consequences of hitting the debt ceiling are too awful to contemplate,” Blinder writes. “A sane Congress wouldn't even think about it.”
All the political issues surrounding debt globally are putting a damper on financial markets, Jeremy DeGroot, chief investment officer of Litman Gregory, tells The New York Times.
“The uncertainty revolving around policy decisions has been a really big factor,” he says. “There are significant deficit issues that developed economies are facing, and the markets are hanging on every development.”
Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did
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