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Exclusive: Goldman Sachs: Even a near default of US debt could lead to recession and market chaos


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CNN

According to the top economist of Goldman Sachs, a full-blown debt ceiling crisis could bring the US economy to a standstill.

“If there is any doubt about the ability or willingness of the U.S. government to pay interest and principal on time, it could have very, very detrimental consequences,” Jan Hatzius, chief economist at Goldman Sachs, told CNN in an interview.

The United States hit the debt ceiling last week, forcing Treasury Secretary Janet Yellen to conduct accounting maneuvers to avoid breaching the $31 trillion limit.

If Congress fails to lift the debt ceiling in time, Hatzius said investors will worry there is a chance of a missed payment on US Treasuries — which are “arguably the most important asset 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 is likely to avoid a recession in the 2024 presidential election.

However, a debt ceiling crisis poses a significant risk to that optimistic outlook.

When asked if a bankruptcy or even a near-bankruptcy could trigger a recession, Hatzius said yes.

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

Economists and US officials have previously warned of dire consequences if the federal government exhausts the extraordinary measures being taken to avoid bankruptcy.

Yellen told CNN’s Christiane Amanpour last week that a “global financial crisis” could ensue if Washington doesn’t pay. Economist Mark Zandi once described an actual default as “financial armageddon.”

History shows that Congress eventually reaches an agreement to raise the debt ceiling, although there have been close talks in the past. In 2011, the United States’ perfect AAA rating was downgraded by S&P Global Ratings as lawmakers struggled to find a compromise. That episode caused turbulence on Wall Street and dented business confidence.

Leaders on Wall Street and Washington have warned that these debt ceiling negotiations could prove particularly challenging.

The historic dysfunction that preceded the election of House Speaker Kevin McCarthy earlier this month underlined how difficult it will be to push controversial legislation through the House of Representatives. Not only does McCarthy preside over a razor-thin majority, but he also agreed to concessions that give the most extreme corner of the GOP significant clout.

Still, Goldman Sachs expects that a debt ceiling agreement will eventually be reached.

“We think a solution will eventually be found,” Hatzius said. “These solutions are often found at the very last minute.”

Assuming the United States breaks through the debt ceiling, Goldman Sachs is optimistic about the outlook for the US economy.

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

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

Goldman Sachs expects the red-hot job market to continue to cool, but only gradually. Hatzius doesn’t see the economy losing monthly jobs at all this year, though he said monthly wage growth could fall below 100,000.

That slowdown, combined with the slowdown in the housing market, the ebbing of the supply chain turmoil and the impact of the war in Ukraine, should help reduce inflation without triggering a recession.

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

“I think inflation has peaked pretty clearly,” Hatzius said, adding that he is “relatively confident” in that call.

The Goldman Sachs economist said his forecast is that the US economic expansion will continue until the 2024 presidential election, although that is not a bull’s-eye.

“The further in time you go … the greater the risk that something bad will happen to you along the way and you will have a recession,” Hatzius said. “By the time you get to November 2024, it’s going to be a close call.”

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