Treasury Forecasts 2008 Recession or Worse if US Defaults

Treasury Forecasts 2008 Recession or Worse if US Defaults

If the Congress fails to raise the $16.7 trillion federal borrowing limit by October 17, the government could begin running out of money to pay its bills, which would result in an unprecedented US debt default.

“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets, but also on job creation, consumer spending and economic growth — with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression,” the Treasury said in a report on Thursday.

The consequences of the default, which include high interest rates, reduced investment, higher debt payments, and slow economic growth, would also be sustainable and “could last for more than a generation,” the department warned.

The Treasury said the “we may be starting to see some tentative signs that the current debate is affecting financial markets,” with the crisis already shaking the Wall Street where the Dow Jones Industrial Average dropped 136.66 points (0.90 per cent) to 14,996.48 on Thursday.

The Treasury also noted that the negative spillovers from an “unprecedented” US default would “reverberate around the world” as “credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket.”

The International Monetary Fund has also sounded the alarm over the American debt crisis, which is putting the world economy under threat.

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