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Exclusive: Goldman Sachs: Even a Near Default on US Debt Could Trigger Recession and Market Mayhem

“If there was any doubt about the ability or willingness of the US government to pay interest and principal on time, it could have very, very adverse consequences,” said Jan Hatzius, chief economist at Goldman Sachs. , to CNN in an interview.
The United States hit the debt ceiling last week, forcing Treasury Secretary Janet Yellen to perform accounting maneuvers to avoid exceeding that $31 trillion borrowing limit.
If Congress fails to lift the debt ceiling in time, Hatzius said investors will fear there is a risk of missed payments on U.S. Treasuries, which are “perhaps the most most important in the global economy.

Unlike many of its peers on Wall Street, Goldman Sachs is relatively bullish on the US economy, with Hatzius telling CNN that America will likely avoid a recession in the 2024 presidential election.

However, a debt ceiling crisis is a major risk to this optimistic outlook.

When asked if a default or even a near default could cause a recession, Hatzius said yes.

“That’s the worry: that you get financial market turmoil, a significant tightening of financial conditions and that adds to the downward pressure on economic activity,” he said. “That’s certainly the concern. It’s not our expectation.”

Economists and U.S. officials have previously warned of dire consequences if the federal government exhausts the extraordinary measures used to avert a default.

Yellen told CNN’s Christiane Amanpour last week that a “global financial crisis” could arise if Washington failed to make its payments. Economist Mark Zandi once described a real default as “financial Armageddon.”

“In the end, a solution will be found”

History shows that Congress finally reaches an agreement to raise the debt ceiling, although there have been strong calls in the past. In 2011, the United States had its perfect AAA credit rating downgraded by S&P Global Ratings as lawmakers struggled to find a compromise. This episode helped trigger turbulence on Wall Street and shake business confidence.

Wall Street and Washington executives have warned that this debt ceiling negotiation could be particularly difficult.

The historic dysfunction that preceded the election of House Speaker Kevin McCarthy earlier this month underscored how difficult it will be to push contentious legislation through the House of Representatives. Not only is McCarthy presiding over a wafer-thin majority, but he’s agreed to concessions that give the GOP’s most extreme corner considerable leverage.

Still, Goldman Sachs expects a debt ceiling deal to eventually be reached.

“We believe that ultimately a solution will be found,” Hatzius said. “These solutions are often found at the very last moment.”

Why Goldman Sachs says a recession isn’t coming

Assuming the US goes through the debt ceiling episode, Goldman Sachs is optimistic about the outlook for the US economy.

“We don’t expect a recession,” Hatzius said, noting that his firm sees a still significant 35% chance of a recession, compared to the consensus on Wall Street of around 65%. “Our baseline is a soft landing.”

And yet a wave of big companies have announced layoffs in recent weeks, including tech giants such as Microsoft and Amazon as well as financial firms like BlackRock and Goldman Sachs itself.

Goldman Sachs expects the hot labor market to continue to cool, but only gradually. Hatzius doesn’t see the economy losing jobs on a monthly basis at all this year, although he said monthly payroll growth could fall below 100,000.

Inflation has “pretty clearly peaked”

This deceleration, combined with the real estate slowdown, the resolution of supply chain turbulence and the impact of the war in Ukraine, should help bring inflation down without causing a slowdown.

Hatzius expects inflation to fall from 9.1% last summer to a range of 2% to 3% by the end of this year or 2024.

“I think inflation has peaked pretty clearly,” Hatzius said, adding he had “relatively high confidence” in the call.

The Goldman Sachs economist said his forecast was for the U.S. economic expansion to continue through the 2024 presidential election, although it’s not a slam-dunk.

“The further you go in time…the greater the chance of something bad hitting you along the way and you getting a recession,” Hatzius said. “By the time you arrive in November 2024, it becomes a closer call.”

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