Friday, January 07, 2011

Update: Gov't Default

Treasury Secretary Tim Geithner sent this letter to the Senate outlining the consequences of a government default.
  • The Treasury would be forced to default on legal obligations of the United States, causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009. 
  • A default would impose a substantial tax on all Americans.  Because Treasuries represent the benchmark borrowing rate for all other sectors, default would raise all borrowing costs.  Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply.  Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale. 
  • Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasuries and the dollar’s dominant role in the international financial system, causing further increases in interest rates and reducing the willingness of investors here and around the world to invest in the United States.
  • Payments on a broad range of benefits and other U.S. obligations would be discontinued, limited, or adversely affected, including:
    • U.S. military salaries and retirement benefits;
    • Social Security and Medicare benefits;
    • veterans’ benefits;
    • federal civil service salaries and retirement benefits;
    • individual and corporate tax refunds;
    • unemployment benefits to states;
    • defense vendor payments;
    • interest and principal payments on Treasury bonds and other securities;
    • student loan payments;
    • Medicaid payments to states; and 
    • payments necessary to keep government facilities open.

Rep Mulvaney, have you read this yet?  Are you still unsure what would happen?

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