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Government Default Would Be Worse than 2008 Crisis

The impasse in Congress and the government shutdown is bad enough. A debt-ceiling crisis would be even worse.

Last week the Treasury Department released a report with a stern warning that failure to raise the debt ceiling could cause a financial crisis and recession worse than 2008, with consequences that could last for more than a generation.

According to the report: “A default would be unprecedented and has the potential to be catastrophic: 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”.

And the impact wouldn’t be limited to the financial markets: a default would reverberate through “job creation, consumer spending and economic growth”.

During the debt-ceiling showdown in 2011, consumer confidence dropped -22%, and small business confidence fell -3%.

And the stocks shuddered: the S&P 500 lost -17%. At the same time, household wealth declined by $2.4 trillion.

Some of the scars left from the political brinkmanship of 2011 are still visible…like the downgrade of the US debt from its sterling AAA rating to AA.

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