From US Treasury press release dated 10/3/2013:
The U.S. Department of the Treasury released a report today on the potential macroeconomic effects of debt ceiling brinksmanship. The report states that a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse. By looking at the disruptions to financial markets that ensued in 2011, the report examines a variety of economic indicators – including consumer and small business confidence, stock price volatility, credit risk spreads, and mortgage spreads – through which a similar episode might harm the economic expansion…
Key Findings of the Report Include:
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The debt ceiling impasse in 2011 contributed to long-lasting scars on financial markets. The financial markets stress that developed in August of 2011 persisted for many months. Then, as now, the economic expansion was vulnerable to adverse shocks.
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Even the possibility of a default could lead to sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence.
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Sharp declines in household wealth. Wealth is an important determinant of household consumption spending, and consumption spending accounts for about 70 percent of GDP. From the second to the third quarter of 2011, household consumption fell $2.4 trillion.
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Increases in the cost of financing for businesses and households. Increases in perceived risk and investor risk aversion mean that investors will demand a higher return on money lent. That higher return implies higher costs of borrowing for households and businesses, which results in lower consumption and investment spending and less hiring. The 30-year conventional fixed-rate mortgage spread over Treasury yields jumped by as much as 70 basis points late in the summer of 2011. In the summer of 2011, the BBB credit spread jumped 56 basis points.
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A fall in private-sector confidence. Consumer and business confidence were falling in 2011, and as the debate about the debt limit progressed, business and household confidence fell to levels that are typically only seen during recessions. It took months before confidence recovered, even though, ultimately, there was no default.
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In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression. The U.S. dollar and Treasury securities are at the center of the international finance system. In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression.
Have a pleasant day.
Update 10/9/2013: Paul Krugman on the yield curve for US treasuries now versus a five weeks ago, Are Treasuries Terrifying? His answer: “Yes and no.”