While state sponsored media pundits and government spokespeople make every effort to dispel doubts about the economic recovery, we need look no further than the two highest level officials who preside over the monetary and financial workings of the United States.

In January, Treasury Secretary Tim Geithner all but confirmed that we are literally on the brink of catastrophic collapse when he wrote, in a letter to Congress, that “failure to raise the limit would precipitate a default by the United States” and “would have catastrophic economic consequences that would last for decades.”

In recent testimony before Congress, Federal Reserve Chairman Ben Bernanke echoed similar views, suggesting that not raising the debt limit would be a “recovery ending event.”

(Video follows excerpts and commentary)

It would be an extremely dangerous and very likely recovery ending event.

First, it would almost certainly create a new financial crisis, as firms that rely on receiving their interest and principal do not receive it, and they’re unable to make payments, and so that problem would cascade through the financial markets.

Then there would be a massive loss of confidence in US Treasury securities, which are the deepest, most liquid market in the world. Interest rates would spike, and that would in turn affect many other assets as well as Treasuries.

So, the near-term effect would almost certainly be a very sharp resumption of the kinds of instabilities we saw in 2008.

Even if we were able, somehow…to avoid those kinds of effects, very likely the interest rate that lenders would demand of the US to finance our debt going forward would be higher, reflecting the great riskiness and uncertainty associated with funding the US government, and that would make our fiscal problems all the more severe, because interest payments are part of the deficit. So, it means that cuts would have to be sharper, and taxes increases larger, and those things themselves would also be a negative for the recovery.

Broadly speaking, it would be, I think , a very, very bad outcome for the US economy.

If you’ve ever wondered what signs you should look for to let you know that the system is falling apart, Mr. Bernanke just gave you somewhat of a road map.

The very fact that Messrs. Geithner and Bernanke are discussing catastrophic collapse and recovery ending events suggests that no such recovery has taken place, the financial markets have not been stabilized, and a return to global economic pandemonium is assured.

Regardless of the actions Congress will take – our view is that they will likely further extend the debt ceiling, because kicking the can down the road is a favorite American politician past time – there is no way out. If the only way to hide insolvency is to borrow more money to avoid complete bankruptcy, then the end result, which will include everything Mr. Bernanke and Mr. Geithner outlined above, will happen. It can be no other way at this point.

China, Russia, Japan and out other creditors already know what’s happening and raising the debt ceiling is not going to change their minds.

All it really does is give everyone a little more time to take preventative measures on an individual level.

Assuming that the current state of affairs is the same as or worse than the problems facing the country in 2008, it is safe to say that when the system does finally come unglued, we can look forward to what then Secretary of Treasury Henry Paulson warned Congressional members would happen if they failed to pass the TARP bailout. We provided some details in a February 2010 commentary titled Are You 100% Sure They Saved the System?:

Many of us were told in private conversations that if we voted against this bill on Monday, that the sky would fall, the market would drop two or three thousands points the first day, another couple thousand the second day, and a few members were even told that there would be martial law in America if we voted no.

-House Representative Brad Sherman (D-California) Debate on the House Floor, October 2, 2008

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Consider this: If the system was about to meltdown in 2008 when Henry Paulson et. al. told then President Bush and Congressional leaders that we would have soldiers and tanks in the streets if they didn’t get the $700 Billion in bailout funds, then how serious of a problem was this to begin with?

Try to envision this scenario.

The only reason for declaring martial law and for why tanks and soldiers would need to be deployed on our streets is because the entire system as we know it today collapses and a state of emergency through martial law has to be implemented.

We’re talking economic, political and social meltdown on a massive, unprecedented scale. Basically, America as you know it to be today would no longer exist. This is how serious it would have to be if tanks and soldiers were dispatched throughout America.

Assuming the financial and economic systems were, in fact, on the brink of complete and total systemic meltdown, how confident can we really be that we have avoided disaster?

As we’ve mentioned previously, what we are witnessing first hand is the largest debt crisis and collapse in the history of the world. The outcome, as Mr. Bernanke so succinctly put it, will be very, very bad for the US economy – and the American people.

Ben Bernanke testifies before Congress:

Hat tip Charlie McGrath