Congress has two weeks to raise the $16.7 trillion limit on federal borrowing and avert what could be an historic default on the government’s debt obligations. Just how bad would it be if the U.S. defaulted on its debt? Economists, business leaders and President Obama have warned that those uncharted waters will be incredibly dangerous. They’d douse the modest growth the U.S. has seen this year, throwing the country back into recession.
Now, the Treasury Department has released its own answer to the question, and it’s just as scary as it’s meant to be:
“A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” the Treasury Department said in a report (see the full report below).
What’s more, the Treasury warned, even discussing the possibility of default has serious costs. "Political brinksmanship that engenders even the prospect of a default can be disruptive to financial markets and American businesses and families," the Treasury report said.
Economists outside the administration have issued similar warnings. “Even mere discussions about not raising the debt ceiling have negative economic implications,” Paul Edelstein and Doug Handler of IHS Global Insight wrote in a report last week. “They raise the perceived risk of doing business with the federal government among holders of Treasury securities and companies with government contracts. Such risk may eventually be seen in higher interest rates and lower equity values.”
The Treasury based its warning mostly on what happened in the summer of 2011, when the debt ceiling brinksmanship leading up to a last-minute deficit-reduction deal shook markets, sapped consumer confidence and provoked Standard & Poor’s to downgrade the U.S. government’s credit rating.
“From June to August 2011, consumer confidence fell 22 percent and business confidence fell 3 percent,” the Treasury report said. “Measures of both had already begun to fall earlier in 2011, in part because of developments abroad, but as the debate about the debt limit grew, these measures of confidence fell further. Moreover, it took months before confidence recovered fully, even though, in the end the debt limit stand-off was resolved.” Household wealth fell $2.4 trillion between the second and third quarters of 2011, and retirement assets dropped by $800 billion.
As disturbing as that history might be, we’ll leave you on an optimistic note: according to a report in The New York Times, House Speaker John Boehner has told colleagues that he won’t let the country default, even if he has to violate the so-called Hastert Rule and rely on Democratic votes to get the debt ceiling raised.