Treasury warns that a default could scar the economy for a generation

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The Treasury Department issued a report Thursday warning that a default on the nation's debt could cause a recession on the scale of the one following the 2008 financial crisis, once again raising the alarm on the looming deadline to raise the debt ceiling.

In the case of a default, the Treasury warned, “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.”

But the report also warned that it’s more than the possibility of default that is cause for worry — it’s also the “political brinksmanship that [engenders] even the prospect of a default can be disruptive to financial markets and American businesses and families.”

Treasury Secretary Jack Lew warned Congress earlier in the week that he has taken the final measures available to him to create headroom under the statutory debt limit, and that by Oct. 17, he will have only cash on hand and incoming revenues to meet the government's obligations on any given day.

Members of the administration, including President Obama himself, have been warning in recent weeks of the fallout from the Treasury missing a payment, and have called upon Congress to raise the debt ceiling immediately -- the only way, they claim, to avoid a crisis.

In an interview with CNBC on Wednesday, Obama cautioned that the resolution to the congressional standoff over the debt ceiling might not be as easy as it was in 2011. “I think this time's different,” he said, telling Wall Street that it “should be concerned” about the possibility that the government might default. So far there have been limited signs that investors are worried that Congress, which is also preoccupied with a government shutdown, will not act in time to raise the debt ceiling.

Lew has said in recent weeks that Wall Street’s confidence in lawmakers’ ability to reach a deal is “greater than it should be” and that he is “cautious and anxious” about a debt limit crisis as the clock runs down to Oct. 17.

In 2011, the Treasury report notes, the drawn-out fight over raising the debt ceiling resulted in reduced consumer and small-business confidence, a $2.4 trillion hit to household wealth as stock markets fell, and elevated bond and mortgage rates.

Another such episode, the report warned, could threaten the still-weak economic recovery -- although the 2011 debate did not appear to derail the recovery then.

“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,” Lew said. “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."

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