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Treasury: New Debt-Ceiling Fight Could Derail Economy

Filed by KOSU News in Business.
October 3, 2013

The Treasury Department is issuing a warning of dire economic consequences that could rival the Great Recession if Congress is unable to agree on raising the debt ceiling and the nation defaults on its obligations.

Treasury’s report, entitled The Potential Macroeconomic Effect Of Debt Ceiling Brinkmanship, comes as Congress is still wrangling over a short-term spending bill to reverse a partial government shutdown that went into effect Tuesday. Later this month, House Republicans and Senate Democrats will need to agree to raise the $16.7 trillion debt ceiling or face a possible default.

“[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, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse,” Treasury said in a statement.

The department said “political brinksmanship that hints at even the prospect of a default can be disruptive,” (emphasis in report) citing the 2011 debt ceiling impasse, when consumer and business confidence fell sharply, job growth slowed and financial markets were stressed.

Treasury Secretary Jacob Lew warned that “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.”

Update At 12:00 noon ET. IMF Chief Weighs In

The head of the International Monetary Fund, Christine Lagarde, echoed comments she made last week on NPR’s Morning Edition, as well as those made by Treasury Secretary Lew and the president. Lagarde said that the failure to raise the U.S. debt ceiling was a far worse threat to the global economy than the current shutdown.

The BBC quotes Lagarde as saying it is “mission critical” that the debt ceiling be raised.

Update At 11:20 a.m. ET. Obama Echoes Treasury’s Warning

Speaking at a small business just outside of Washington, President Obama echoed the Treasury Department’s dark assessment on Thursday, blaming Republicans’ “obsession” with dismantling the healthcare overhaul for the government shutdown and the looming fight over the debt ceiling.

The president said “the whole world will have problems” if the U.S. defaults on its obligations. [Copyright 2013 NPR]

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