“A default would inflict catastrophic far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment,” Treasury Secretary Tim Geithner said in a letter.
Treasury Secretary Tim Geithner said if Congress fails to lift the debt ceiling and the U.S. defaults on its obligations “this abrupt contraction would likely push us into a double dip recession,” painting the most explicitly dire prediction to date of the consequences of inaction.
In a heavily-anticipated response to Sen. Michael Bennet, D-Colo., who asked Geithner to document the economic and fiscal impacts of failing to lift the statutory debt limit, the Treasury secretary detailed a chain reaction that would cripple the economy, costing jobs and income.
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“A default would inflict catastrophic far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment,” said Geithner in the letter to Bennet which was dated May 13. “Even a short-term default could cause irrevocable damage to the economy."
Geithner has imposed an August deadline for Congress to lift the $14.3 trillion debt ceiling, but lawmakers are still negotiating over Republican demands to tie the move to spending cuts. And a portion of the GOP still remains skeptical about the need to act by the deadline at all, arguing that the consequences have been overstates.
In the letter Geithner walked through the doomsday scenario he has been describing on the Hill. Default would cast doubt on the full faith and credit of the U.S., which would scare away investors and enable those remaining to demand higher interest rates on Treasury securities, which would have far-reaching negative ramifications. Increased borrowing costs would extend to families, businesses, and local governments, he said.
Because Treasury securities set the benchmark interest rate for a variety of consumer credit products, an increase in interest rates could drive up the cost on everything from mortgages to car loans and business loans.
A default on our obligations would also sap household wealth, threatening retirement savings; what's more, it could cut off Medicare and Social Security payments and cause another financial crisis, the letter said.
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