The Briefing Room
General Category => National/Breaking News => Topic started by: mystery-ak on October 03, 2013, 05:35:47 pm
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http://www.nbcnews.com/business/treasury-warns-default-could-be-worse-great-recession-8C11329540 (http://www.nbcnews.com/business/treasury-warns-default-could-be-worse-great-recession-8C11329540)
Treasury warns default could be worse than Great Recession
The Associated Press Staff
2 hours ago
The U.S. Treasury Department is warning that the economy could plunge into a downturn worse than the Great Recession if Congress fails to raise the federal borrowing limit and the country defaults on its debt obligations.
A default could cause the nation's credit markets to freeze, the value of the dollar to plummet and U.S. interest rates to skyrocket, according to the Treasury report released Thursday.
Treasury officials hope by laying out potential consequences they will be able to bring pressure on Congress to act. Treasury Secretary Jacob Lew has said he will have used up the extraordinary measures to avoid breaching the debt ceiling by Oct. 17. After that, the government will have around $30 billion of cash on hand.
The report looked at the disruptions caused to financial markets during a similar stand-off between the administration and Congress over raising the debt limit. It then made projections about what could occur if there were an actual default.
In August 2011, Congress eventually raised the nation's borrowing limit before a default occurred but only after a protracted debate. The politics that nearly led to a default prompted Standard & Poor's to cut the nation's credit rating by a notch.
"As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy," Lew said in a statement. "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," Lew said.
The report notes that even the possibility of a default could roil financial markets and damage the economy, thereby harming American businesses and households. Sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence, all tend to undermine economic expansion. It also states that if the current government shutdown is protracted, it could make the U.S. economy even more susceptible to the adverse effects from a debt ceiling impasse than it was prior to the shutdown.
In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression, it said.
"The U.S. dollar and Treasury securities are at the center of the international finance system. In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression."
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There is not going to be a default, no matter what. The debt ceiling will be raised, as both parties know it must. The only variables are: by how much and for how long.
The Treasury Deartment, acting in concert with the Administration of which it is a part, is trying to spook the financial markets, and perversely speaking, with good reason.
Treasury needs authority to issue more debt, which will then be sold to primary dealers, before being flipped back to the Federal Reserve in exchange for cash that will end up... in the stock market.
Because the only remaining buttress for equity prices is a steady supply of Federal Heroin.
In a near zero-interest rate regime where the Fed now owns more than a third of America's debt (and where no one else is buying, long-term), the markets no longer move based on corporate fundamentals or on technical signals, but on whatever words emanate from Ben Bernanke's mouth.
It won't end well, at all. But it won't end just now.
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On the count of three please don your helmets, as the sky - in fact - is falling.
Uno, dos ...