The U.S. Treasury Department is warning that the economy could plunge into a downturn worse than the Great Recession if Congress fails to raise the federal borrowing limit and the country defaults on its debt obligations.
A default could cause the nation’s credit markets to freeze, the value of the dollar to plummet and U.S. interest rates to skyrocket, according to the Treasury report released Thursday.
Treasury officials hope by laying out potential consequences they will be able to bring pressure on Congress to act. Treasury Secretary Jacob Lew has said he will have used up the extraordinary measures to avoid breaching the debt ceiling by Oct. 17. After that, the government will have around $30 billion of cash on hand.
The report looked at the disruptions caused to financial markets during a similar stand-off between the administration and Congress over raising the debt limit. It then made projections about what could occur if there were an actual default.
In August 2011, Congress eventually raised the nation’s borrowing limit before a default occurred but only after a protracted debate. The politics that nearly led to a default prompted Standard & Poor’s to cut the nation’s credit rating by a notch.
“As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy,” Lew said in a statement. “Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need—a self-inflicted wound harming families and businesses.”
Our nation has worked hard to recover from the 2008 financial crisis, and Congress must act now to lift the debt ceiling before that recovery is put in jeopardy,” Lew said.
The report notes that even the possibility of a default could roil financial markets and damage the economy, thereby harming American businesses and households. Sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence, all tend to undermine economic expansion. It also states that if the current government shutdown is protracted, it could make the U.S. economy even more susceptible to the adverse effects from a debt ceiling impasse than it was prior to the shutdown.
In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression, it said.
“The U.S. dollar and Treasury securities are at the center of the international finance system. In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression.”
(AP)
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6 Responses
I seriously doubt the career economists in the Treasury are working today since they really are non-essential, meaning the “officials” in the article are patronage hacks.
The biggest threat is continuing to run massive deficits, financed by the Federal Reserve printing a trillion dollars a year. Plus there is the damage of installing a health insurance system that penalizes employers for hiring, while forcing many people to pay more for insurance, or to accept less coverage.
Before making any comments, I first must state that Treasury Secretary Jacob Lew is a Shomer Shabbos shul-attending Jew…BUT…he is also known as a fierce Obama loyalist. If you recall, when Secretary Lew was undergoing confirmation hearings, the media openly speculated that the fact that Lew was an Obama loyalist was the reason that he was chosen for treasury. Lew is a budgetary expert and not an expert in Treasury policy. For that reason alone, take his “doom and gloom” comments “with a grain of salt”.
Obama and Lew are first and foremost political operatives. Obama wants to bash the Republicans into submission so he is bringing out all of his big guns.
I believe that this would be the best thing for this country in the long run. Short term it may be really hard but long term it will be the best thing. It will create jobs at home. This country is like a monopoly game playing with credit.
I think the previous three commentors are not playing with full decks.
#1 – I agree that running deficits and ObamaCare are bad. But a debt default is much worse. The deficits and health care problems must be solved over time, slowly and steadily. However, it is my bet that you were not around during 1929, when for a week people paid for everything with IOUs, because nobody wanted to trust a dollar, and most people couldn’t get any anyways, because the banks were closed.
#2 – the fact that a Presidential appointment is filled by a friend of the President is nothing new; welcome to politics 101. The fact that he is frum is not significant. And, he is a numbers man. Nobody in my memory was a Treasury expert until he was confirmed.
#3 – same a #1 above. You didn’t live through it the first time. It was hell. Did you ever run to the bank in your pajamas with a raincoat over them, get to the bank, and find a CLOSED sign? I doubt it.
You guys just don’t know what you are talking about.
If you read I said it will be hard in the beginning but long term it will be the best thing. #4 you obviously don’t realize this country is way off track and they are just making things worse everyday. As they say by addicts the only way an addict will begin to listen is when they hit rock bottom. You have a good point to do it slowly and calculated. However we have been saying that for a long time and it just keeps getting worse and worse. I think we need to hit rock bottom to go up. I think now is the best time and I am willing to suffer to make things better.
#5 – You must be young. You don’t know what suffering is. In this case, it will be people starving, and one might be you. Sometimes the medicine can kill the patient.
I agree with you that the patient is sick, and has been for a long time. However, you need to be careful how far down hitting bottom really is.
Hard at the beginning is one thing. Death at the beginning makes it difficult to look at the long term. To put things in perspective, if you were walking on Wall Street in 1929 your chances were pretty good of dying by being hit by someone jumping.
I agree with you 100% that we need a balanced budget with some money set aside to start paying down the debt. I am just scared of seeing history repeat itself.
I do remember Clinton playing this game, but he only had the budget to worry about then, not the debt ceiling and an economy that is sluggish at best. If they would raise the debt ceiling so we don’t default, I would agree to a government shutdown until they put through a balanced budget. Frankly, I think they should stop paying Congress and the rest of the Government, and then see how quickly they can agree to balance the budget.