I am certain you will agree that it is strongly in our national interest for Congress to act well before the debt limit is reached. However, if Congress were to fail to act, the specific consequences would be as follows:
*
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:
o
U.S. military salaries and retirement benefits;
o
Social Security and Medicare benefits;
o
veterans’ benefits;
o
federal civil service salaries and retirement benefits;
o
individual and corporate tax refunds;
o
unemployment benefits to states;
o
defense vendor payments;
o
interest and principal payments on Treasury bonds and other securities;
o
student loan payments;
o
Medicaid payments to states; and
o
payments necessary to keep government facilities open.
For these reasons, any default on the legal debt obligations of the United States is unthinkable and must be avoided. It is critically important that Congress act before the debt limit is reached so that the full faith and credit of the United States is not called into question. The confidence of citizens and investors here and around the world that the United States stands fully behind its legal obligations is a unique national asset. Throughout our history, that confidence has made U.S. government bonds among the best and safest investments available and has allowed us to borrow at very low rates.
Failure to increase the debt limit in a timely manner would threaten this position and compromise America’s creditworthiness in the eyes of the world. Every Secretary of the Treasury in the modern era, regardless of party, has strongly held this view. Given the gravity of the challenges facing the U.S. and world economies, the world’s confidence in our creditworthiness is even more critical today.
I hope this information is responsive to your request and will be helpful as Congress considers this important legislation.
Sincerely,
Timothy F. Geithner
cc: The Honorable John A. Boehner, Speaker of the House
The Honorable Nancy Pelosi, House Minority Leader
The Honorable Mitch McConnell, Senate Minority Leader
The Honorable Dave Camp, Chairman, House Committee on Ways and Means
The Honorable Sander M. Levin, Ranking Member, House Committee on Ways and Means
The Honorable Max Baucus, Chairman, Senate Committee on Finance
The Honorable Orrin Hatch, Ranking Member, Senate Committee on Finance
All other Members of 112th Congress