Have the politicians in Washington lost their minds? Are they living in the Land of Oz? These questions are being raised by people across the nation – whether they are Democrats, Republicans, or Independents – and around the world.
As Congress and the President spar over raising the debt limit, their inaction is costing the economy approximately $300 million per day, according to some estimates. This consists of lost economic output associated with the government shutdown.
As the level of uncertainty increases, this creates hesitancy on the part of businesses to invest. And it encourages consumers to save rather than spend.
But perhaps the most crucial aspect of the games being played in Washington is the prospect of the U.S. defaulting on its debt if, as many warn, the shutdown lasts for weeks. To state that such an occurrence would be catastrophic is a vast understatement of the consequences, both in this country and abroad.
A default would be unprecedented. The United States has never defaulted on its payments. The nation came to the brink of doing so in 2011 before the issue was resolved at the last minute.
The parties will probably reach an agreement before the October 17 deadline. This is the date the government will run out of money unless the debt ceiling is raised.
Let’s review what could happen if the country defaulted. The credit markets would lock up and freeze as trading ceases. The value of the dollar would plunge, and U.S. interest rates would escalate. Unfortunately, this would come at a time when the economy is fragile and struggling to recover from the last crisis.
The International Monetary Fund (IMF) has warned that a default would spread across the world like wildfire. This could create a worldwide financial crisis, setting off financial panics.
This is significant since the IMF, created in the waning days of World War II, is an organization of 188 countries. It works to foster global monetary cooperation, secure financial stability, facilitate international trade, and promote sustainable economic growth around the world.
Hopefully, the crisis will be resolved soon, possibly by the time this is printed. After this occurs, the real work of addressing the nation’s mounting fiscal issues should begin immediately.
Wayne Curtis, Ph.D., a former superintendent of Alabama banks and university business school dean, is retired from the board of directors of First United Security Bank. He may be contacted at wccurtis39@gmail.com.
