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U.S. default over debt limit would cause severe recession: Zandi

Mark Zandi, chief economist of Moody's Analytics, speaks at the Reuters Real Estate and Infrastructure Summit in New York June 20, 2011. REU
Mark Zandi, chief economist of Moody's Analytics, speaks at the Reuters Real Estate and Infrastructure Summit in New York June 20, 2011. REU

WASHINGTON (Reuters) - A failure by Congress to raise the U.S. debt limit in time to avoid a default would spark a severe recession, a prominent economist warned lawmakers on Wednesday.

Mark Zandi, chief economist at Moody's Analytics, told the congressional Joint Economic Committee that the U.S. Treasury will be unable to meet all of its payment obligations as early as October 18 and by November 1 at the latest without an increase in the $16.7 trillion borrowing cap.

He said up until early October, financial markets, which have been "desensitized" by past budget battles, will anticipate a last minute deal by Congress.

Financial markets will start to get jittery by early October if there is no clear path to a deal, Zandi said. That will turn into panic once Treasury can't make payments.

"If you don't do it in time, confidence will evaporate, consumer confidence will sharply decline," Zandi said. "Businesses will stop hiring, consumers will stop spending, the stock market will fall significantly in value, borrowing costs for businesses and households will rise."

He said if the government can only spend what it takes in, about nine percent of U.S. economic output will evaporate.

"We'll be in the middle of a very severe recession and I don't see how we get out of it. There's no monetary policy response in the current context. We're already at zero interest rates."

(Reporting by David Lawder; editing by Andrew Hay)

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