"A default would inflict catastrophic,
far-reaching damage on our Nation's
economy, significantly reducing growth,
and increasing unemployment."
The Wall Street Journal
By: Damian Paletta
WASHINGTON—Treasury Secretary Timothy Geithner warned in a letter to Congress that failure to raise the $14.294 trillion debt ceiling would drive up interest rates, push down household wealth, put more pressure on federal entitlement programs and cause a double-dip recession.
Mr. Geithner's letter to Sen. Michael Bennet (D., Colo.), sent Friday, marked one of the Obama administration's most explicit warnings about the consequences of failing to raise the debt ceiling. The U.S. government is projected to hit the ceiling Monday. Treasury officials say they have until Aug. 2 before the country could begin defaulting on its debt.
Some Republicans have questioned whether the Treasury would allow a default to occur, but Mr. Geithner said in the letter that "failure to raise the debt limit would force the United States to default on these obligations, such as payments to our service members, citizens, investors, and businesses."
"This would be an unprecedented event in American history," he wrote. "A default would inflict catastrophic, far-reaching damage on our Nation's economy, significantly reducing growth, and increasing unemployment."
Republicans leaders have said they want to raise the debt ceiling but only if the White House agrees to accompany its major spending cuts. House Speaker John Boehner (R., Ohio) has said it would be "irresponsible" to let the U.S. default, but "it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process."
The White House and Republicans have begun deficit-reduction talks. Early signs of progress were reported last week, but they haven't reached an agreement and talks aren't expected to pick up again until June. Policy makers have discussed ways to reduce the deficit from what it would otherwise be by close to $4 trillion over 10 years.
Mr. Geithner, Federal Reserve Chairman Ben Bernanke and other government officials have warned for months about the consequences of defaulting on the country's debt. Because the U.S. government is projected to run a $1.5 trillion deficit in fiscal year 2011, it must borrow to cover its obligations unless it makes huge spending cuts or enacts giant tax increases. To borrow, the government issues debt to investors, but it is much harder to issue debt once the country hits the debt ceiling.
A default would make it more expensive for the U.S. to borrow money by selling Treasury securities, Mr. Geithner said, and this would have wide repercussions.
"Treasury securities set the benchmark interest rate for a wide range of credit products, including mortgages, car loans, student loans, credit cards, business loans, and municipal bonds," Mr. Geithner wrote. "Accordingly, an increase in Treasury rates would make it more costly for a family to buy a home, purchase a car, or send a child to college. It would make it more expensive for an entrepreneur to borrow money to start a new business or invest in new products and equipment."
Mr. Geithner said a default would have the "perverse effect" of making the country's debt problems worse. He said it would lead to a recession, which would drive down tax revenue, while putting more pressure on "social safety net programs."
This would "channel a larger share of our national wealth toward paying our creditors rather than reducing our debt or making productive investments in education."
Many Democrats have joined Republicans in calling for a deficit-reduction plan to clear the way for a debt-ceiling increase. But in the last few weeks, business groups have begun urging lawmakers with more urgency to raise the ceiling soon to avoid a premature reaction from bond investors.
"It is absolutely urgent and essential that we craft a comprehensive plan that materially reduces the deficit," Mr. Bennet said. "But as this letter states, playing politics with the debt limit would rattle the capital markets, blow an even bigger hole in our deficit and would likely throw our economy into another deep recession. That is unacceptable, especially since Congress has the power to prevent it. We need a responsible and comprehensive approach to deficit reduction, not political games that put our country and our economy at risk."