How A US Debt Crisis Standoff Could Cause A Recession  

• A fight between Republicans and Democrats over the debt limit ceiling could send the U.S. economy into a recession. Even if the standoff doesn't actually trigger a debt default, analysts say a much worse downturn could occur with perhaps 7.5 million people thrown out of work.
• Already some corners of the vast market for U.S. debt are feeling a sharp pinch after Treasury Secretary Janet Yellen on Monday said that by early June the government may run short of the money to stay current on its bills - whether they are payments owed to foreign or domestic investors in Treasuries, federal employees and contractors or Social Security pensioners.
• Total government spending on average is about $525 billion a month. A big chunk of that, about $225 billion on average in the first quarter, is deficit spending. Hitting the debt ceiling would mean the government could no longer run that budget shortfall, delivering an immediate blow to millions of Americans who rely on government money directly or indirectly.
• The market reaction from an unprecedented U.S. default would bludgeon away billions more in wealth, and while analysts have floated a few workarounds to keep money flowing, including invoking a constitutional provision that would likely face challenges in court, all are untested.
• Investors are taking the risk seriously. Yields on as much as $650 billion of Treasury securities maturing in the first half of June rocketed to record highs after Yellen's announcement, reflecting the increased chance that they may not be paid off on schedule. The cost to insure U.S. government debt against default has shot to the highest since the 2007-2009 financial crisis.
• Nationwide Chief Economist Kathy Bostjancic was already expecting a recession later this year, as the Federal Reserve's rapid-fire interest-rate hikes aimed at battling inflation raise borrowing costs for households and businesses and slow bank lending. All of that takes air out the economy's tires and could start to push up the unemployment rate, now at a historically low 3.5%.

(Source: Reuters)