November 24, 2014

UW economist warns of uncertainty at edge of default (AUDIO)

A UW Madison economist says even the threat of default by the federal government will stress financial markets. Professor Menzie Chinn said, with U.S. Treasuries used as collateral for a lot of short term lending, edging up to the precipice of default is bound to lead to uncertainty.

“The whole system for firms to be able to borrow and lend short-term is going to grind to a halt,” he said. “Or at the very least it’s going to be a lot of uncertainty, so interest rates will spike up all along the way,” said Chinn, a Professor of Public Affairs and Economics at  UW’s La Follette School of Public Affairs.

AUDIO: Bob Hague interview (4:00) 

“I think as it becomes apparent that it’s very hard to get an agreement between the various parties and that time is short – you can’t do these things instantaneously – I expect a lot more volatility.”

Negotiations are continuing in Washington, with a Thursday deadline to increase the debt ceiling. The U.S. Treasury would only have cash on hand to pay bills to the end of the month. Chin doesn’t think a resolution can be reached before the economy is impacted. “My guess is that it won’t be timely enough so that we don’t have some self-inflicted harm.”

Chinn notes that the government shutdown of 2011 was enough to raise the costs for the federal government to borrow money. “The markets are going to be roiled considerably at exactly a time where you don’t need the markets to be roiled, and it may that the very fact that you edge up to the precipice means that everybody is going to require a higher rate of return than they otherwise would have to hold U.S. Treasuries,” Chinn said.