Mark Zandi: A default would be a catastrophic blow to the U.S. economy

Joe Biden very often references Moody's studies when he is trying to make a point on the economic progress in the U.S. economy.

He could use the latest Moody's Mark Zandi to underscore any point being made to fellow politicians on both sides of the aisle on the need to have a debt ceiling deal done ASAP.

Shutting the government down would not be an immediate hit to the economy, but a default would be a catastrophic blow to the new economic recovery from the COVID-19 pandemic, said Zandi, widely followed chief economist of Moody's who rose to fame for prescient calls before and during the Great Recession.

The blow from default on our debt due to lawmakers not extending the debt ceiling would be particularly acute to investors in the stock market, according to Zandi.

Stock prices would be cut roughly in one-third with the worst of the sell-off, wiping out $15 trillion in household wealth. Treasury yields, mortgage rates, and other corporate borrowing rates spike, at least until the debt limit is resolved and repaid through Treasury. Even then, rates never return to where they were. Since U.S Treasury securities no longer would be risk free, future generations of Americans would have to pay a steep economic price, said Zandi, referring to the potential fallout in asset markets.

In large part, the stock market pressure would reflect the major economic blow dealt by debt default.

Explains Zandi, The hit to consumer confidence would be severe. If the impasse over the debt limit lasts all of November, the Treasury will have no choice but to eliminate a cash deficit of approximately $200 billion by slashing government spending. Annually, this is equal to more than 10% of GDP. Zandi's dire predictions come on the heels of Treasury Secretary Janet Yellen warning of catastrophe if the debt ceiling debate isn't settled.

The U.S. has never defaulted on itself. Doing so would likely precipitate a public health crisis that would compound the damage of the historic financial crisis. Default could trigger a spike in interest rates, a steep fall of stock prices and other financial turmoil. Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost, Yellen said in an op-ed in The Wall Street Journal.

As it stands, lawmakers remain locked in a contentious battle on the issue.

On Tuesday, the Democrat-ruled House approved a short-term government funding bill that provides funding through Dec. 3 and is due by January 31. It also includes a provision to suspend the debt limit until Dec. 16, 2022.

The bill is likely to die on the floor of Republicans - controlled Senate.

Brian Sozzi is an editor-at - large and anchor at Yahoo Finance. Follow Sozzi on Twitter, and LinkedIn.