WASHINGTON — The Treasury Department warned Thursday that a failure by Congress to raise the country’s debt limit could have a “catastrophic impact” on the U.S. economy.
This story first appeared in the October 4, 2013 issue of WWD. Subscribe Today.
In a six-page report, Treasury said the economy could fall into a recession if Congress fails to reach an agreement on raising the nation’s $16.7 trillion borrowing limit by Oct. 17.
The federal government is entering its third day of a shutdown after Congress failed to reach a deal to fund the government, and experts are concerned the impasse on Capitol Hill will spill over into the debate on the debt ceiling, which, if breached, will force the country to default on its debt obligations.
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The Treasury report said a default could cause credit markets to freeze, force the value of the dollar to plummet and cause interest rates to skyrocket, which would “reverberate around the world.”
“Political brinkmanship that engenders even the prospect of a default can be disruptive to financial markets and American businesses and families,” the report said.
“As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy,” said 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.”
The report cited the Congressional impasse over the debt limit in 2011, which led to the first-ever downgrade of the country’s credit rating and negative economic consequences.
Congress eventually raised the debt ceiling and did not default, but the impact was felt throughout the economy.
Consumer confidence fell 22 percent from June to August in 2011, while business confidence fell 3 percent, according to the report.
The S&P 500 index fell 17 percent during the debt-limit debate in 2011, and household wealth fell $2.4 trillion between the second and third quarters of that year. Household wealth is tied to consumer spending, which accounts for approximately 70 percent of gross domestic product.
In addition, stock prices, stock-price volatility, credit-risk spreads and mortgage spreads all “deteriorated” in August that year and took many months to recover.
As part of the domino effect, lower stock prices reduced retirement security during the same period in 2011, and retirement assets fell $800 billion, the report said.
The report also noted that economists’ forecast for real GDP to accelerate to a 2.4 percent annual rate in the second half this year and a 2.8 percent rate in 2014 has already been put “at risk” because of the government shutdown.
One key economic indicator — the jobs report — is being postponed due to the shutdown. The Labor Department said Thursday it is postponing the release on Friday of the September jobs report, which includes the unemployment rate and total number of jobs added to or subtracted from payrolls. The agency did not announce a new release date.