No Way Out of Recession Sparked by Failure to Raise Debt Ceiling

If U.S. lawmakers fail to raise the federal government’s borrowing limit this month they will cause a “very, very severe recession with no obvious way out,” Moody’s Analytics Chief Economist Mark Zandi said Friday.

With the government unable to enact fiscal policies and the interest rates set by the Federal Reserve already near zero, “there would be no policy levers” to use against the resulting recession, Mr. Zandi said in a conference call with clients.

Mr. Zandi’s comment’s echo recent warnings from Wall Street titans like Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein and from the White House.

The U.S. Treasury has said it will run out of room to maneuver to remain below the $16.7 trillion debt limit “no later” than Oct. 17 unless Congress raises it. That deadline is fast approaching, even as the government entered its fourth day of shutdown because of deep-seated disagreements among lawmakers over spending.

If the debt ceiling isn’t raised, Treasury will have to match its ongoing expenditures to its revenue on a day-by-day basis. Since the government spends more than it takes in, the inability to borrow money will take billions of dollars out of the economy that it injects through daily operations and spending. The situation could also eventually lead to a government default if the Treasury is unable to make payments to its creditors.

Even if the U.S. Treasury were to prioritize debt repayment over outlays for Social Security, Medicare and other payments, investors would grow increasingly nervous about their holdings of government debt securities. “The real unknown is how financial markets will react,” Mr. Zandi said.

Against this backdrop, Mr. Zandi expects to investors to start applying increasing pressure on lawmakers in Washington to resolve the twin fiscal crises. He noted the stock market this week has been “softening,” while the cost of insuring U.S. Treasuries against default has been rising. “If this drags into next week the sell-off will start to intensify,” he said.