Debt Crisis Assessment | Yellen: Could Trigger a Constitutional Crisis; J.P. Morgan Analyst: No One Wants to Get Hit by a Bus

U.S. Treasury Secretary Yellen warned that failure to raise the federal debt limit by Congress could trigger a "constitutional crisis," leading to economic and financial disaster.

JPMorgan Analyst: No One Wants to Get Hit by a Bus

Not only does Yellen hope that Congress will reach an agreement as soon as possible, Federal Reserve Chairman Jerome Powell also emphasized in a news conference last week that failure to raise the debt ceiling in a timely manner would plunge the U.S. economy into a quagmire with serious consequences.

"This should not be a question, or even a discussion for that matter. Why should we be talking about the consequences of the U.S. not being able to pay its debts? In the event of that happening, the Federal Reserve would not be able to protect the economy, the financial system, and the reputation of the United States."

As mentioned earlier, the probability of default on the debt ceiling is very low, as parties view the debt ceiling as a tool to constrain their opponents. This is also the prevailing view among most analysts and experts.

The head of Queens' College at Cambridge University, Mohamed El-Erian, stated that it is expected that the Democratic and Republican factions will reach an agreement at the eleventh hour. However, if they fail, there will be extremely serious economic and financial consequences, especially as the global economy is facing high inflation, high interest rates, and turmoil in the banking sector.

The last time the U.S. approached the debt ceiling was in 2011, and although an agreement was reached at the last minute, credit rating agency Standard & Poor's still downgraded the U.S. sovereign debt rating (from AAA to AA+), leading to a significant stock market decline and exacerbating the Eurozone crisis.

JPMorgan's Chief Economist, Michael Feroli, made a grim analogy:

"If you have the flu, you wouldn't want to get hit by a bus (debt default), but then again, no one expects to be hit by a bus in the first place."