Debt ceiling breach could bring global economic catastrophe

Experts warn that the U.S. government defaulting on its obligations would make shutdown effects look meek

Furloughed federal workers protest outside the U.S. Capitol to demand an end to the lockout of federal workers caused by the government shutdown, on Oct. 4, 2013, in Washington.
Win McNamee/Getty Images

WASHINGTON — If the government shutdown, now in its fourth day, has been giving economists and the business community heartburn, the prospect of reaching the federal government’s debt limit without legislation to raise the country’s borrowing authority is downright nightmarish.

“It’s so scary, I don’t even want to think about it,” said David Kendall, a senior fellow for health and fiscal policy at the center-left think tank Third Way.

The United States actually brushed up against its $16.7 trillion debt limit in May, but the Department of the Treasury has used creative means to keep the government functioning through the summer. If Congress doesn’t pass a bill to raise the debt cap by Oct. 17 to prevent the U.S. from defaulting on its obligations, government officials and a wide array of economists have predicted it will plunge the globe into another recession and cause widespread economic chaos.

“It’ll be a massive hit to our financial system and the U.S. economy at a time when we’re still recovering,” said Stan Veuger, a resident scholar at the right-leaning American Enterprise Institute. “It’ll be even worse than last time.”

Others said what was particularly frightening about a default was the unknowable: It would be an unprecedented self-inflicted wound.

“If we go past this deadline and see a default, we’re operating off the map,” said Adam Hersh, an economist at the Center for American Progress, a liberal think tank. “We don’t know what all the ramifications of that would be, except to say it would be quite extreme. We don’t want to really find out what would happen.”

A Treasury report released earlier this week about the consequences of not raising the debt ceiling sounded similar alarms.

“A default would be unprecedented and has the potential to be catastrophic: Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” the report said.

Congress has routinely raised the debt cap since the 1960s, but in 2011, conservative members of the GOP-controlled House tied their votes to raise the limit to policy concessions from congressional Democrats and President Barack Obama. That crisis ultimately led to the deep cuts in defense and domestic spending.

House Republicans again have said they want to tie the debt-ceiling vote to more spending cuts or defunding the Affordable Care Act, Obama’s signature health care law.

It is widely acknowledged that coming within days of default without a deal in 2011 had widespread negative economic impacts, including a downgrade of the U.S. credit rating, lower consumer confidence, slower hiring, lower stock prices and a stagnation of household wealth.

Approaching the Oct. 17 deadline without a deal is already taking a similar economic toll, creating uncertainty for businesses and investors, economists said.

“Some of the initial effects are more market uncertainty, stock markets will start falling if they don’t see a solution on the horizon, and the next thing is interest rates’ creeping up in anticipation of a problem,” Kendall said. “If we come close to default, you’ll see business holding back on decisions on employing people and making investments.”

House Speaker John Boehner said Thursday that he would not allow the U.S. government to default and would violate the so-called Hastert Rule to raise the debt ceiling, referring to an informal procedure which forbids a GOP speaker from bringing anything to the House floor that does have the majority support from the Republican caucus.

According to a recent CNN poll, about 56 percent of Americans said there would be negative consequences if the debt ceiling were not raised, with 38 percent saying it would be a good thing for the country.

Some analysts say that relatively tepid support is the effect of a federal government that’s been addicted to crisis for the last three years, setting deadlines and coasting past them. Falling off the “fiscal cliff” was painted as a catastrophe by both parties; it went into effect anyway.  Democrats and Republicans said they wanted to avoid a government shutdown; that deadline fell at midnight Monday.

“Now we have this third thing, the debt ceiling, and we’re saying this will be a major calamity if we default, and a lot of Americans say, ‘We’ve heard this before,’” said Michael Strain, a resident scholar at the American Enterprise Institute. “There’s a lot of people out there who are trying to downplay the significance of this, and generally speaking, there are a lot of technical aspects about economics and finance that people don’t have a great understanding of.”

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