(c) 2013, The Washington Post.
(c) 2013, The Washington Post.
World stock markets sank Monday as the U.S. government ambled toward a shutdown that could dent the country's economic recovery.
Losses in New York were led by the Dow Jones industrial average, which fell 128.57 points, or nearly 1 percent. The drop was even steeper in Europe, and it was most acute in Asia, where Japan's Nikkei fell more than 2 percent.
It was a reminder of the U.S. economy's still-central role in the world system and how trouble here can affect other nations.
In recent months, the United States has emerged as a strengthening powerhouse while Europe remains in the economic doldrums and major developing nations have begun to sputter.
Even a minor spasm in the United States — if it translates into slower growth, less consumer spending or reduced imports — could damage the fortunes of the rest of the world. A major meltdown — an extended government closure or, in the worst-case scenario, a default on U.S. government debt — could be calamitous.
As the trading day closed without a hint of an agreement in Congress on a plan to continue funding federal agencies, it appeared that the vast federal bureaucracy would at least briefly grind to a halt — leading to lost income for hundreds of thousands of employees and lost revenue for contractors and suppliers.
"The current impasse over the continuing resolution and the debt ceiling creates an atmosphere of uncertainty that could affect confidence, investment, and hiring in the U.S.," ratings agency Standard & Poor's wrote in an analysis of whether it would lower the country's debt rating if the government closes.
The answer: probably not, since government shutdowns tend to be short-lived and have little lasting impact on the economy. The last, in late 1995 and 1996, didn't impede a 13 percent rise in the Dow between November and January of those years.
But it would be a negative turn of events at a time when many economists see growing signs of strength in the U.S. economy — and even improvement in its federal finances.
Overall government debt levels are beginning to moderate, and the nation's account deficit — a reflection of its relations with other nations — has been narrowing.
The impact on growth from the federal spending sequester, the expiration of tax hikes and other deficit-trimming measures has also begun to abate, prompting some economists to boost their forecasts of U.S. growth in the months ahead.
As Monday's stock market performance suggests, however, a government shutdown would throw that into doubt.
Economists say they can measure the impact in a direct way, with estimates of a few tens of billions of dollars a week in lost economic output.
Yet "it is not a disaster, provided it does not go on very long," since back salaries would have to be paid and contracts resumed quickly once a new spending bill is approved, said Nariman Behravesh, chief economist of the IHS Global Insight consulting firm.
In the event that officials do not raise the debt ceiling in October, even a brief default by the U.S. government on its bonds might not damage the country's credit rating, S&P wrote, since the default would be driven by a political impasse — not, as in the case of Greece, from underlying economic weakness.
The default, therefore, would only last as long as the stalemate continued among politicians, and bondholders would be paid soon after.