Debt ceiling standoff: Time to panic?

Politicians and financial experts are starting to worry that Washington's stalemate is about to trigger a financial meltdown

President Obama speaks to the media after House Speaker John Boehner (R-Ohio) said he will end debt negotiations with the Obama Administration.
(Image credit: Alex Wong/Getty Images)

Stocks around the world were weighed down early Monday as investors grew increasingly worried that congressional leaders and President Obama would not be able to strike a debt deal in time to avert a financial disaster. Talks between President Obama and House Speaker John Boehner collapsed on Friday, and congressional Republicans and Democrats failed to come up with their own plans to raise the debt ceiling and cut federal spending over the weekend. The Treasury Department says if there's no deal to allow the government to borrow more by Aug. 2, it won't have enough to cover all its bills. Is it time to prepare for the worst?

It is time to panic, if only to force Washington to act: Boehner's decision to walk out of the talks, says Zachary Karabell at The Daily Beast, served as "the proverbial smelling salts that snapped global markets" out of the dream that saner heads will prevail. Republicans, especially Tea Partiers, "grievously underestimate" the calamity we face if we get too close to the Aug. 2 deadline, and it will take a stock and bond market panic to get them to act. And that's precisely what they're about to get.

"Wall Street freakout?"

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE
https://cdn.mos.cms.futurecdn.net/flexiimages/jacafc5zvs1692883516.jpg

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

This is not the end of the world: The markets will panic if we hit the debt ceiling, says Rick Kahler at Financial Awakenings, but "even if prices drop, nothing fundamental will have changed about our economy." If Aug. 2 passes with no deal, Congress will face such an avalanche of angry criticism that it will surely do something pretty quickly. So if stock prices fall, keep a cool head and "consider picking up some bargains. The sale won't last long."

"Don't panic if we hit the ceiling"

If a panic occurs, it won't be pretty: Once people become convinced this "game of 'chicken' over the nation's debt is going to end badly," say Steven C. Johnson and Richard Leong at Reuters, they'll start dumping Treasuries and the dollar, "driving up interest rates, damaging business confidence, and weakening an already fragile U.S. economy even more." That will trigger a sell-off of stocks and other risky assets, dragging down the global economy and creating "the kind of nightmare that keeps investors awake at night."

"Markets to hold U.S. feet to fire as default threatens"

To continue reading this article...
Continue reading this article and get limited website access each month.
Get unlimited website access, exclusive newsletters plus much more.
Cancel or pause at any time.
Already a subscriber to The Week?
Not sure which email you used for your subscription? Contact us