U.S. Treasury: default would be like ‘late 2008 or worse’


The U.S. Treasury released a short analysis today laying out dire predictions about what would happen if the debt ceiling is not raised the the government goes into default. They looked at the economic impacts of the 2011 threat of default and found that the mere possibility resulted in real economic impacts.

The Potential Macroeconomic Impact of Debt Ceiling Brinkmanship

The bottom line:

In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth—with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression.

Obama says he won’t negotiate with Republicans over the debt ceiling — because that would set a precedent encouraging brinksmanship every time the debt ceiling will need to be raised in the future. Yet it’s hard to imagine he’ll let the country go into default. The deadline is Oct. 17.

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U.S. Treasury: default would be like ‘late 2008 or worse’

  1. The first people to feel it would be anyone on Social Security. The SS fund in the US is 100% “invested” in US government bonds and T-bills. That’s right, the US government has lent the entire SS fund to itself. Every penny of it.
    Contrast that to the CPP, which holds $0 in Canadian federal government debt, though it does hold some provincial & municipal debt.

    • Interesting. So in reality there is no SS fund. All bond redemptions come from current government taxation revenues and nothing more. The bonds are just a smokescreen.
      The whole idea that payments from a government program (SS) are funded by investments in government debt, which in turn are simply paid by taxes, is truly bizarre. Why bother with the bonds at all? It’s pointless.

      • Even worse. Most current bond redemptions are paid for by selling new bonds. Worse still, many of those new bonds are purchased directly by the Federal Reserve, which does so to avoid a catastrophic failed bond auction, and also to keep yields suppressed enough for the government to survive another day. In case you were wondering why the Fed keeps putting off “tapering” its bond purchases, even though a recovery of some sort does seem to have taken hold, there’s one possible reason. They’re afraid they might throw the US government into default.

        • I do know that most current bond redemptions are paid for by selling new bonds, which in its own right is not neccessarily bad, it just means that debt levels are not declining.
          However, I agree that quantitative easing is benefiting the government over everyone else, and that tapering is a further risk to government solvency. I was aware of that horrific partnership between the Fed and the government.

      • http://www.ssa.gov/oact/progdata/fundFAQ.html#a0=1

        By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury.

  2. Well .. that’s what Treasury says. What does Dr. Seuss say ?
    The well-informed US electorate is waiting.

  3. The US Treasury has been instructed by the White House to say it will be a disaster.

    To get an object analysis, ask a third party with expertise.

    • The Council on Foreign Relations quotes mostly from the Government Accountability Office’s report on the 2011 debate and its effects. The GAO puts the 2011 hit on the taxpayers of the 2011 debate (note, not ACTUALLY refusing to raise the debt ceiling, but the threat that they MIGHT do so) at $1.3 billion, and the 10 year costs of the debate at $19 billion.

      The CFR also points out that in last days of July and first days of August, during which the debate occurred, the DOW lost 2,000 points, including 635 points on August 8th, one of the worst single day drops in history.

      All of this, keep in mind, was the result of Congress TALKING about not raising the ceiling. Actually failing to raise the ceiling and going into default would presumably be significantly worse.