Failure to Raise Debt Ceiling Could Significantly Impair U.S. and Global Economies, Researcher Says

Crisis unlikely to cause global economic crisis, but could

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FAYETTEVILLE, Ark. – Raja Kali, economics professor at the University of Arkansas and expert in emerging global economies, is available to discuss the International Monetary Fund’s warning Thursday that the U.S. failure to raise the debt ceiling would seriously damage the American and global economy.

Although the impact of the shutdown thus far is relatively minor, Kali agrees with Fed Chairman Ben Bernanke and other economists that it could produce deleterious consequences for both domestic and international financial markets. Minor percentage-point increases in U.S. Treasury rates due to the shutdown, for instance, will eventually cost billions of dollars for the U.S. economy.

But the real concern, Kali says, is the mere threat that Congress and the president will fail to raise the debt ceiling by the Oct. 17 deadline. Kali points to recent reports that markets are currently waking up to the government shutdown and debt-ceiling deadline. During the last debt-ceiling crisis, S&P downgraded the U.S. government credit rating from AAA to AA+, which impaired investor confidence in U.S. Treasury bonds.

The current crisis could cause a similar reaction, Kali says. Furthermore, if the debt ceiling is not raised, the U.S. Treasury will have difficulty paying its bills, may have difficulty paying interest and principal on Treasury securities and may be forced to renege on Social Security payments.

If the debt ceiling is not raised, investors may decide that U.S. Treasury bonds are no longer the world’s most secure investment, Kali says. Interest rates across the board will rise, as will costs for mortgages, car loans and corporate borrowing. The crisis could cause credit markets to freeze, and the value of the U.S. dollar to plummet. All of these consequences will cause turmoil in international financial markets and could trigger a global economic crisis, Kali says.

Kali studies global trade and financial networks, industrial organization, developing economies and emerging international markets. He is the ConocoPhillips Chair in International Economics & Business in the Sam M. Walton College of Business.

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