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Neon Tommy - Annenberg digital news

Why Debt Ceiling Debate Is Worse Than Government Shutdown

Raishad Hardnett |
October 3, 2013 | 12:29 p.m. PDT

Executive Producer

Treasury Department says debt ceiling crisis could be more "severe than any seen since the Great Depression."
Treasury Department says debt ceiling crisis could be more "severe than any seen since the Great Depression."

The Treasury Department published a report on Thursday detailing the macroeconomic catastrophe that would occur if the U.S. defaults on its debts.

If Congress fails to raise to the debt ceiling by October 17, the Treasury Department states, the results could lead to an economic downturn worse than the 2008 Great Recession. "Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, [and] the negative spillovers could reverberate around the world," the report warns.

Here are 7 reasons why the U.S. government defaulting on its loans could have a worldwide economic effect several times more disastrous than the government shutdown.

1) Consumer confidence

Even the possibility of default would affect the financial markets. This means that with every article, every Tweet, every passive conversation that even entertains the idea of a U.S. loan default, a lower consumer confidence would threaten to make household wealth plummet and the cost of borrowing rise.

2) Higher interest rates

When investors are less willing to invest, the interest rate -- or the cost of borrowing -- rises and the level of overall economic investment falls, undoing the economic growth that the U.S. has been steadily working toward since its 2007-2009 recession.

(ALSO SEE: House Lists Demands to Raise Debt Ceiling) 

3) The history of debt ceiling

Recent history has shown the potential impact of failing to raise the debt ceiling. In 2011, Congress underwent a similar debt ceiling scare, where a number of conservative GOP lawmakers were reluctant to raise the limit. This impasse caused a scare in the financial markets that went on for months; consumer confidence fell 22 percent from June to August 2011, and S&P stocks fell by 17 percent and did not recover until 2012.

4) The fall of the dollar

The U.S. dollar is at the center of the world economy. Nearly every developed nation in the world holds U.S. dollar as a reserve currency, meaning that a default on Treasury securities would create a ripple effect that could shake the world economy to the core.

5) Job creation

Businesses that are uncertain about whether they'll receive returns on their loans to the Treasury Department may delay, or even freeze, hiring. 

6) The effect has already started

There are signs that the debt limit debate is already affecting the financial markets. Prices are already beginning to move. According to the Treasury Department, although the price moves are small and could easily reverse quickly, the fact that yields on Treasury bills that mature at the end of October are higher than bills that mature immediately before or after, might suggest nascent concerns about possible delays in payments on those bills. If market participants were to lose confidence in the United States’ willingness to repay its debts, the adverse effects seen in 2011 could reappear."

7) Lessons from other countries

In nations that have defaulted on their loans, the resulting effect of slow economic growth, decreased levels of investment, and higher interest rates have shown that a default's results "could last for more than a generation."

Read more of Neon Tommy's coverage on the debt ceiling debate here

To contact Executive Producer Raishad Hardnett, email him here or find him on Twitter.



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