Reports of Serious Economic Damage if Debt Ceiling Not Raised are Debated

May 14th, 2011
in Background

default dominoes Econintersect:  Today (Saturday, May 14) Politico reported that Treasury Secretary Timothy Geithner yesterday sent a letter to Senator Michael Bennett (D, Colorado) that maintained that failure to act to raise the debt ceiling by the time the current limit is reached would have dire consequences.  This is the latest in a series of ominous statements from Geithner and Fed Chairman Ben Bernanke, reported by The Huffington Post.  Republicans have set condition regarding spending cuts and some have maintained that technical default would not cause the disaster the Obama administration has proclaimed.  See report by Fox News (link below - Sources).

Follow up:

Not all conservatives are in agreement, however,  according to the Wall Street Journal.  The Journal reports that the U.S. Chamber of Commerce, generally a conservative organization, has urged "expeditious" raising of the debt limit.

Reuters has reported that study by an orgaization they label "centrist", think tank Third Way will release a report Monday that gives specific about potential outcomes of federal default, even if briefly.  Here is a list from Reuters:

  • Treasury bonds would lose their aura of safety, leading to a half-point increase in their interest rates. That would push up the U.S. government borrowing cost once lending activity resumed, leading to a $10 billion increase in annual budget deficits over the short term.
  • The higher interest rates would ripple through the economy, causing gross domestic product to decrease by 1 percent and employers to shed 640,000 jobs.
  • Banks would curtail lending. Small businesses would have a harder time expanding and credit-card interest rates would rise. Student loans and car loans would become more expensive.
  • The S&P 500 stock index would lose 6.3 percent in value over three months, causing retirement portfolios to shrink, the report said, citing research by financial services firm Janney Montgomery Scott.
  • The U.S. dollar's status as the world's reserve currency could be threatened as investors move cash to Swiss francs, Japanese yen, or Euros. That could boost U.S. exports but raise the cost of consumer goods like gasoline and electronics.
  • Home mortgage rates, which are tied to U.S. Treasury rates, would rise. Homebuyers taking out an average mortgage for a new home, currently $221,900, would pay an extra $24,738 over the life of the loan, dealing another blow to an already struggling housing market.

A link at the Huffington Post leads to the following graphic:

default-dominoes1

Politico has a link to a draft of the report.

Source:  Reuters , The Huffington Post, Politico, Fox News and  thirdway.org

Hat tip to Sanjeev Kulkarni 









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