Nobel economist Paul Krugman warns of cascading chaos in financial markets if the US defaults on its debt

• Markets should brace for chaos in event of a US debt default, Paul Krugman warned.
• The economist pointed to potentially dire consequences if the US doesn't raise the debt ceiling in time.

The US defaulting on its debt would spark chaos across financial markets, according to Paul Krugman, with the warning from the Nobel economist coming just weeks before a possible debt ceiling deadline is reached in June.

"There are pretty good reasons to panic if we actually do have a technical default, because US government debt is the foundation on which world financial markets rest," the top economist said in an interview with Yahoo Finance on Friday, warning of the potential ramifications if Congress doesn't raise the national debt limit in time.

"If it suddenly turns out that the US government doesn't necessarily honor its promises to pay T-bills, then who knows, but it could be a cascading series of financial dislocations."

The US debt ceiling als makes no sense to begin with, Krugman added, as Congress would be voting to raise the borrowing limit after already passing legislation that requires government funding. That's similar to ordering a meal at a restaurant and refusing to pay it, he said, previously making the case to eliminate the debt ceiling altogether.

"None of this is about fundamental decisions about spending or taxing or the budget deficit. This is all about whether, for political reasons, the party that controls one house of Congress can force the US to renege on promises it's already made," Krugman added. "This is a crazy kind of double jeopardy on government operations that makes no sense at all."

Policymakers are still sparring over raising the government's borrowing limit, with President Biden scheduled to meet with House Speaker Kevin McCarthy and other congressmen on Tuesday to discuss a potential solution. But McCarthy has said he would reject a short-term debt ceiling raise without negotiating budget cuts, after having proposed a bill in April that would slash around $4.5 trillion in government spending.

Congress has less than a month to raise the debt ceiling before the government potentially runs out of money, Treasury Secretary Janet Yellen warned, a scenario experts have said could lead to a financial crisis and deepen an oncoming recession.

Krugman previously outlined three things that the Biden administration could do to fund itself if the US fails to raise the debt ceiling in time. That includes methods like invoking the 14th amendment to assure the reliability of US debt, and minting a $1 trillion platinum coin to be deposited at the Federal Reserve, which, in effect, would give the government a backdoor method to borrowing more money.