US could see a fight over debt ceiling that rocks markets, Goldman Sachs warns

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CNN Business

Republicans and Democrats are expected to clash next year over the debt ceiling, a fight that could rattle financial markets, confuse consumers and threaten the economy with a recession.

The looming battle in Washington could trigger the worst uncertainty since 2011 that cost America its AAA-rated credit rating and cause chaos on Wall Street, Goldman Sachs warned clients in a note on Monday.

“To raise the debt ceiling next year, bipartisan support will be necessary but difficult to achieve,” Goldman Sachs economists wrote in the report.

“Debt” is what it sounds like – the amount the government is allowed to borrow, after Congress enacted more than a century ago to limit government borrowing. But when push came to shove, Congress raised the debt earlier to avoid a US debt default that economists warned was a “fiscal Armageddon.” That’s what lawmakers did in late 2021 following a final deal on the debt settlement.

Goldman Sachs says that there have been “more false positives over the past decade than real close calls.”

Washington met again last week to hammer out a deal that averted the rail threat.

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But Republicans have shown they are fighting the debt crisis.

House GOP Leader Kevin McCarthy, who is running for Speaker of the House, told CNN before the midterm elections that Republicans will need to cut spending to get rid of the debt. Republican Senator John Thune of South Dakota told Bloomberg last week that the debt could be a way to cut the budget.

This will set the stage for a dangerous financial security risk that puts the US debt default, or call, at risk.

“We are concerned that the administration will not be able to do this. management the administration of the administration

Goldman Sachs said that next year’s politics will be “similar to 1995 and 2011” – two of the most troubling debates on the credit level in recent history. The report said many, though not all, of these conflicts occurred when Republicans controlled one chamber of Congress during a Democratic presidency.

“Next year will provide political and economic conditions for another tumultuous debate, and more thin data in both chambers and rising inflation will add to the uncertainty,” Goldman Sachs wrote in the report. “While it’s hard to predict, it seems unlikely that next year’s debt deadline will bring the same level of uncertainty as it did in 2011, but there’s a chance it’s closer than at any time since then.”

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A close call could cause chaos on Wall Street resulting in losses for retirement accounts and American businesses every day.

“It appears that uncertainty about the credit rating in 2023 could lead to significant volatility in the financial markets,” Goldman Sachs economists wrote, noting that the 2011 crisis led to a rally in the US stock market.

Beyond the markets, Goldman Sachs said that failure to raise the debt over time “would pose a greater threat to government spending and economic growth than it would to Treasury institutions alone.”

This is because in order to avoid defaulting on the US debt, the government changes the currency to pay interest to the Treasury. That would create a huge hole that would need to be filled by delaying many other expenses — including things millions of Americans depend on like wages for government workers, benefits for veterans and Social Security payments.

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Goldman Sachs wrote: “Failure to pay on time can undermine consumer confidence.

The good news is that Washington appears to have plenty of time to reach the debt ceiling before the crisis.

Economists at Jefferies said in a recent report that the volatility risk would not be seen until “at least” the end of September next year.

Although the federal debt is expected to reach its peak in the next few weeks, Goldman Sachs said the Treasury Department should continue to borrow as usual until the end of February or early March. At this time, the government can get up to 500 billion dollars to pay the bills until August.

Furthermore, there is considerable uncertainty over when the default risk will materialize due to a number of moving factors, including student loan repayments and tax revenues.

“Funds may dry up as soon as July and at the end of October,” Goldman Sachs said.


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