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Economists warn if debt standoff isn't solved, it would kick-start a recession


For a look at how financial markets and investors are being affected by the debt ceiling impasse, we turn now to Mark Zandi. He's a chief - he's chief economist at Moody's Analytics.

Good morning, Mark.

MARK ZANDI: Good morning, Leila.

FADEL: So, Mark, this country is less than two weeks away from the day the U.S. may not be able to pay its debt. How is the standoff over the debt ceiling impacting people with an investment portfolio right now?

ZANDI: Well, Leila, so far, investors are very nonchalant. There's some evidence that they're a bit nervous. You can see that yields on one-year - excuse me - one-month treasury securities have jumped. And that's because investors are worried about what happens on the other side of the X Date, the date when the Treasury doesn't have enough cash to pay everyone, and they're worried that they might not get their money on time.

There's some evidence in the so-called credit default swap market of some concern. That's the market where investors can go buy insurance if there's a default on the Treasury debt. They have to pay a premium for that insurance. And that premium has jumped in price. But other than that, no big deal. I mean, nothing's going on in the stock market, nothing going on in the broader corporate bond market. So so far, I think investors are taking this all in stride, thinking that they've seen this movie before.

FADEL: What advice do you have right now to regular people with investments? That includes many people's retirements.

ZANDI: Well, do nothing. I mean, you, I, most Americans are in this for the long haul. We should be saving regularly, putting cash away, investing in stocks and other assets consistent with how much savings we have and what our risk tolerance is. And we - this is for the long run. We shouldn't be focused on the here and now. So I'd say do nothing. You know, psychologically, you might want to buckle in because I suspect we are going to see some bad days in the stock market here dead ahead. It may, in fact, be necessary to get lawmakers to sign on the dotted line and increase the debt limit. We might need to see that turmoil. But don't do anything. Just buckle in. And if you don't need to look at it, don't look at it.

FADEL: What happens, though, if - I mean, as you say, people are saying we've seen this movie before, an expectation that even though there's all this brinksmanship, there will be a deal. But what happens if there is no deal by June 1?

ZANDI: It's going to be a mess for sure. You know, if we breach, then the Treasury has to make some tough decisions about who gets paid, who doesn't get paid. I suspect they're going to pay bondholders, and everyone else that the government owes money to will get their money late. So it will be chaotic. The economy is going to likely go into recession, and the longer it drags on, the more damage it will do, the more severe. And then words like catastrophic, you know, come to mind. And, of course, we'll be paying a price forever because investors are going to demand a higher interest rate to compensate for the risk that this will happen again.

So it'll be a complete mess. So in that scenario, yeah, we're going to be a lot less wealthy. But again, I don't know that there's anything that you and I, as individual investors, can do here. We just have to buckle in and hope these lawmakers get it together in time.

FADEL: And if they do get it together in time and they don't default, are there still long-term impacts on the markets? And how does that affect the average person?

ZANDI: Yeah, absolutely, because, you know, investors are looking at this and saying, look, this is pretty dysfunctional, and why do I - why would I think this is going to get any better? You know, the next time we come down this this road, we're going to see the same kind of turmoil and maybe even worse, because each time we go down this road, we get closer and closer to breaching and defaulting. So I think investors are going to say, hey, you know, you guys aren't money good. You're not the triple-A credit on the planet. You've got to pay me more in interest. And, you know, even a little bit higher interest rate on a lot of debt is very expensive to us as taxpayers. So, yeah, we're going to pay for this.

FADEL: Mark Zandi, chief economist at Moody's Analytics. Thank you.

ZANDI: Thank you. Transcript provided by NPR, Copyright NPR.

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