There’s no end in sight to the standoff on Capitol Hill, and that had markets reacting with something of a nervous laugh on Tuesday.
If market graphs could speak, they might be asking lawmakers in Washington something like the following: “You maniacs! You’re not actually thinking of going through with this are you?”
The lack of a resolution to the impasse in Washington has raised the very real prospect that the U.S. government might default on its debt, a reality reflected in the markets today.
On Tuesday afternoon, President Obama went before reporters at the White House to press his case for an end to the stalemate, one that would require recalcitrant Republicans in the House to back off their demands to roll back the president’s signature health care overhaul. That has created a situation in which what seemed like the impossible — that the U.S. government would stop paying its bills — now seems possible.
Curious what a burgeoning era of political lunacy might mean for world markets? Here’s your preview.
If Obama intended to calm investors’ nerves with Tuesday’s briefing, the results are likely to disappoint the president. As Obama engaged in a rambling, hour and a half-long back-and-forth with reporters, the Dow bounced around before continuing its slide on the day:
The standoff in Washington is also fueling a broad rise in market volatility. The graph below, courtesy of Businessweek‘s Joshua Green, shows the rise in one volatility index on the week. As for that MS Paint dollar sign, here’s Green’s explanation: “If you bet on higher volatility (VXX) after hearing Boehner threaten default Sunday, you’ve made a bundle.”
Meanwhile, global markets are watching the situation in Washington with bated breath. Trading on the Nikkei futures market is pointing to a sharply lower opening on Asian markets, and the FTSE in London closed down 1.11 percent. Stocks across Europe closed down on the day, driven in large part by fears of a U.S. default. If worldwide losses weren’t enough to drive home the implications of a potential U.S. failure to raise the debt ceiling, the International Monetary Fund also downgraded its global growth forecast on Tuesday, citing the risk posed by a U.S. default. Oh, and if that wasn’t enough, Gallup’s Economic Confidence Index, which measures Americans’ confidence in the U.S. economy, saw its largest single week decline since the bankruptcy of Lehman Brothers in 2008 set off a global recession:
As Dan Drezner wrote for FP on Tuesday, this economic news may actually play in Obama’s favor and could serve as a key part of his negotiating strategy, forcing Republicans to budge in the face of heavy economic losses. But that’s a strategy that’s predicated on the idea that the Republicans realize the economic consequences of failing to raise the U.S. debt ceiling. That may not be the case.
Here’s how Rep. Ted Yoho, a Florida Republican and one of the congressmen behind the current deadlock, assesses the consequences of a U.S. default: “I think, personally, it would bring stability to the world markets.”
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and a senior editor at The National Interest. Prior to Fletcher, he taught at the University of Chicago and the University of Colorado at Boulder. Drezner has received fellowships from the German Marshall Fund of the United States, the Council on Foreign Relations, and Harvard University. He has previously held positions with Civic Education Project, the RAND Corporation, and the Treasury Department.| Argument |