The U.S. Department of the Treasury released a report today on the potential macroeconomic effects of debt ceiling brinksmanship, saying that a default would be unprecedented and has the potential to be catastrophic:- credit markets could freeze,
- the value of the dollar could plummet, and
- U.S. interest rates could skyrocket.
According to Treasury Secretary Jacob J. Lew “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."
Key findings include:
- Even the possibility of a default could lead to sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence.
- Increases in perceived risk and investor risk aversion mean that investors will demand a higher return on money lent, which implies higher costs of borrowing for households and businesses, which results in lower consumption and investment spending and less hiring.
- In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression.
- There may be signs that even current debate is affecting financial markets. Treasury bills that mature at the end of October are higher than bills that mature immediately before or after suggests nascent concerns about possible delays in payments on those bills. A loss of confidence in the United States’ willingness to repay its debts would push up yields on Treasury securities, which would raise the cost of financing the government’s debt and worsen the fiscal position of the government.
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