Will Failing to Raise the Debt Ceiling Have Disastrous Consequences?

Treasury Secretary Timothy Geithner has previously warned that Monday is the day of reckoning—the U.S. government has reached its legal debt limit. Although Geithner has claimed that he can prolong the consequences of that fact an additional 11 weeks, he steadfastly worked in various testimonies to push Congress into raising the debt ceiling. According to the Huffington Post, in a letter penned on Friday, Geithner warned that failing to raise the debt ceiling could “lead to concerns about the solvency of the investment funds and financial institutions that hold Treasury securities…a severe and sudden blow to confidence in the financial markets can spark a panic that threatens the health of our entire global economy and the jobs of millions of Americans.” Federal Reserve Chairman Ben Bernanke made similar comments. On Thursday, in front of the Senate Banking committee, Bernanke urged congress to raise the debt ceiling and not to use the debt limit as a “bargaining chip.” President Obama joined in, too, stating in an interview with CBS News that not raising the debt ceiling would lead to “a worse recession than we already had, a worse financial crisis than we had already.” Despite the unanimous rhetoric from Geithner, Bernanke, and Obama, some remain skeptical about the ramifications of raising the debt ceiling. According to ABC News, many freshman Republican congressman—having been elected with the support of deficit-hawk Tea Party groups—are loathe to raise the debt ceiling without an agreement in place that would reduce overall government expenditure. The Heritage Foundation disagrees with the notion that raising the debt ceiling is an economic necessity. According to Heritage's Vice President of Domestic Economic Policy David S. Addington, not raising the debt ceiling will not cause a default at all. Rather, the Treasury will simply not be able to borrow any additional money and will have to delay the payment of less important financial obligations. If congress is unwilling to raise the debt ceiling, it may have strong consequences for the U.S. dollar. It might strengthen the dollar, as investors could interpret congress' new spending restraint as a positive catalyst for the greenback. Traders who believe that this may be a likely scenario may consider PowerShares DB US Dollar Bullish Index UUP. Inversely, failing to raise the debt ceiling could be disastrous for the U.S. dollar should the warnings of Geithner, Bernanke, and Obama prove to be true. In this scenario, traders might want to consider PowerShares DB US Dollar Bearish Index UDN. With the debt ceiling issue looming overhead, it should be an interesting summer for U.S. treasuries and the dollar.