Today's economy

Do we need to worry about the debt ceiling?

By Kevin Press,

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The odds are low, but the fight that has shut down the U.S. federal government and could trigger an American debt default affects Canada, too.

Do we need to worry about the debt ceiling?Those of us who are optimistic about the global economic recovery will see our confidence put to the test this month, as U.S. politicians work to negotiate an end to the federal government shutdown and an increase in the country’s debt ceiling. It’s hard to imagine a scenario in which Republicans and Democrats fail to reopen the government and at least negotiate an extension to the debt-ceiling deadline. But it would be an overstatement to say there is nothing to worry about in Washington.

A bit of background first. Today is day seven of an almost complete shutdown of U.S. federal government services. Congress failed to pass a funding bill that would have kept the doors open last week. But that’s only part of the story. On Oct. 17, the U.S. Treasury Department will have used the last of its so-called extraordinary measures to meet the government’s debt obligations (the debt ceiling was hit in May).

Neither scenario — a shuttered federal government nor a down-to-the-wire debt-limit fight — is unprecedented. They’re not even particularly uncommon. The debt limit has been raised (or temporarily suspended or exempted) 18 times in the last 20 years. The government shut down twice during the same period: for six days in 1995 and 21 days a year later. And importantly, U.S. politicians have taken advantage of these events to negotiate serious policy matters. What’s happening now is nothing new.

While the policy question in play here was originally President Obama’s Patient Protection and Affordable Care Act, this weekend’s Sunday morning news programs made clear that the debate will now focus more broadly on U.S. government debt. Both parties will argue that Washington has to get its debt under control. Republicans will call for lower spending, Democrats for higher taxes.

The question for the rest of us is: Can they come to some agreement before the Oct. 17 deadline? Should Congress fail to raise the debt limit (by far the more important of the two issues), it would have potentially catastrophic results for the U.S. and global economies.

I say potentially, because no-one really knows how this grim scenario would play out. The U.S. Treasury Department warned: “Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

But of course no-one has an interest in this happening. All involved recognize that the debt limit has to be raised. The real risk for the global economy is not that Republicans and Democrats aren’t committed to striking a deal. The risk is that they’ll fail to meet the deadline by mistake; that some procedural mix-up or miscommunication will spiral out of control and the country will slide into default. That’s unlikely, but not impossible.

My hunch is we’ll see a last-minute deal to extend the deadline on Oct. 17. Whether or not the two parties can come to some kind of grand bargain on the spending vs. taxes debate is really anyone’s guess.

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