Stock markets tracked losses in Wall Street on Wednesday as investors grow increasingly concerned about stalled US debt ceiling talks aimed at averting a painful default.
The optimism that flowed through trading floors at the start of the week has given way to trepidation, with several Republicans questioning an early June deadline, and some even saying the country is nowhere near running out of cash anyway, as per a report by AFP.
All eyes are now on Washington, where President Joe Biden and House Speaker Kevin McCarthy have had a number of meetings to find a path to lifting the borrowing limit from the current $31.8 trillion.
How will Americans be affected if the political standoff in Washington over the debt ceiling were to prevent the government from issuing funds that support a significant portion of the economy?
- According to a report by Reuters, Main Street could experience several consequences. Firstly, Americans might witness a sharp decline in their retirement accounts as stock markets react negatively to the situation.
- Additionally, within a matter of days, the absence of federal payments could have significant impacts on doctors’ offices, retirees, and workplaces nationwide. This could create financial strain and disruption in various sectors, affecting the livelihoods of many individuals and businesses on Main Street.
- As per Reuters, if the U.S. Congress and the White House were unable to raise the self-imposed federal debt limit of $31.4 trillion, it could lead to serious consequences. According to Treasury Secretary Janet Yellen, the Treasury Department might begin missing payments on its obligations as early as June 1. This would put immense pressure on Washington to prioritize payments on U.S. bonds, which are crucial for the global financial system. Failing to make a bond payment would trigger a catastrophic financial crisis, potentially causing a historic Wall Street meltdown.
- Even if the Treasury managed to make timely payments to bondholders, which is the anticipated course of action, the political dysfunction fueling the crisis would erode trust in America’s economic prospects. Consequently, the value of various assets owned by Americans, such as homes and retirement portfolios, would decline significantly. This would result in a widespread drop in stock prices, commercial real estate values, and house prices, impacting nearly everything in the economy. The overall impact would be substantial and disruptive, affecting individuals and the broader economy.
- If a default on the federal debt were to occur, it would have severe implications on the economy. Interest rates would rise, making it more challenging to secure loans for buying homes, cars, or starting businesses, as per Reuters The resulting financial chaos would quickly push the economy towards a recession, economist Mark Zandi told Reuters.
- The consequences could worsen further. Following a default, mass layoffs that typically accompany a recession could occur within weeks. Additionally, hundreds of billions of dollars in federal spending could be withheld from the economy, affecting various sectors. Doctors’ offices, hospitals, and insurance companies would be among the first to face difficulties. On June 1, approximately $47 billion in Medicare payments, which provide public health insurance for older Americans, are due
- The interruption of these payments could leave some doctors unable to meet their financial obligations, leading to challenges in paying staff and other bills. Difficult decisions would have to be made regarding scheduling surgeries and procedures without the necessary funds. The longer the default situation persists, the more disruptive it would become for the healthcare sector and the broader economy, as highlighted by health policy expert Tricia Neuman.
- The consequences of a default would have a direct impact on various sectors and individuals. On June 2, around a quarter of the nation’s retirees, totaling approximately $25 billion, might find that their expected Social Security payments were not deposited into their bank accounts.
- In addition, payments to government contractors would cease, including $1 billion owed to defense contractors on June 2. By June 9, parts of the federal workforce, totaling 2 million employees, could experience a delay or lack of payment, amounting to $4 billion in salaries. Similarly, schools relying on $1 billion in federal funding might have to manage without it, while some payments could be significantly delayed.
- As a result, individuals would be vigilant about their bank accounts, anticipating missed deposits. Simultaneously, concerns over the nation’s creditworthiness would cause turmoil on Wall Street, potentially leading to a decline in the value of people’s life savings, further adding to the economic distress caused by the default situation, the report by Reuters said.
AFP, Reuters contributed to this report