Donald Marron
International investors knocked down the dollar and stock prices on September 30 as a shut-down of the U.S. government looked ever more likely. But it is less the furloughing of federal employees that concerns them than the next phase of this political battle in Washington: the debate over raising the debt ceiling.
Investors are accustomed to such brinkmanship in Congress resulting in a last-minute accord; they are skeptical that any shutdown would last very long. (That is not to say investors wouldn’t use even a short shuttering as an excuse to sell off equities; the Standard & Poor’s 500 index is still close to its record high and hasn’t seen a sustained correction so far this year.)
The more dangerous confrontation is over the need for Congress to lift the debt ceiling to allow new government borrowings after October 17, which is when the U.S. Treasury runs out of funds to meet its bills, raising the possibility of a default on America’s debt. One sign of that growing anxiety is that the spread on the five-year U.S. credit default swap (a measure of the cost of insuring against a default) widened to 36 basis points on Monday, from 31 basis points at the end of last week. Two weeks ago, the spread was 22 basis points.
Donald Marron, director of Economic Policy Initiatives at the Urban Institute and a former member of the President’s Council of Economic Advisers, told the recent Blouin Creative Leadership Summit that failure by Congress to lift the debt limit will result in severe economic harm, by delaying first hundreds and eventually — through serial ratchetings-up — hundreds of billions of dollars of payments. That delay, if prolonged, would amount to an “anti-stimulus” that could push the U.S. economy back into recession. An actual default on federal debt could see even more severe results. Interest rates would spike, credit tighten and institutions would scramble for cash — an uneasy echo of the 2008 financial crisis.
