In just over two years, we have endured the 2011 debt ceiling fight, which shaved over 2,000 points off the Dow Jones Industrial Average and the December 2012 “fiscal cliff” fiasco, which further unnerved investors.
Americans are confronted with yet another bitter budget battle that threatens to undermine a still fragile economic recovery and inflict serious damage on our financial system.
As I write this article, the government shutdown is entering its ninth day with no signs of a resolution in sight. Unfortunately, due to furloughs and cutbacks in government services and social programs, many Americans have already been affected. The longer it continues, the greater the impact on the private sector and the more likely its effects will be felt by all of us.
Still, while the precise consequences of the shutdown are impossible to predict, most economists expect that the shutdown alone, unless allowed to continue for weeks, is unlikely to cause long-term damage to the economy.
The bigger worry for economists, policy experts and business leaders is the looming debt ceiling deadline. Although no one knows exactly how it will play out, most agree that if Congress fails to pass a debt ceiling increase before the Oct. 17 deadline, it would necessitate a large and immediate cut in government spending. This would deliver a damaging blow to the U.S. economy and financial markets and could result in a default on our debt.
Not surprisingly, this most recent game of brinkmanship in Washington has begun to take its toll on investor confidence. After a steady decline during the run-up to the shutdown, the Gallup’s Economic Confidence Index has plunged more in the last week since the start of the shutdown than it had since the collapse of Lehman Brothers in 2008, an event which has become synonymous with the worst financial crisis in over 80 years.