To The Debt Limit And Beyond

Will the bottom fall out of the economy on Oct. 17 if Congress refuses to raise the debt ceiling? New York Times columnist Joe Nocera talks to Weekend Edition Sunday host Scott Simon about what the extended government shutdown and the debt limit could mean for our economy.

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SCOTT SIMON, HOST:

As Chris just indicated, there are some signs of progress in talks between President Obama and Senate Republicans - but still no deal. Many Republicans in the Senate are hoping to get their House counterparts to agree to a proposal to both end the shutdown and extend the debt ceiling - perhaps by Monday morning, when financial markets open again. We're joined now by our friend Joe Nocera, columnist for The New York Times. Joe, thanks so much for being with us.

JOE NOCERA: Oh, thanks for having me, Scott.

SIMON: Why hasn't the stock market dropped, at least yet, in the midst of all this?

NOCERA: Well, Mr. Market feels pretty strongly that he's seen this show before. And...

SIMON: He's counting on something to be worked out at the last minute.

NOCERA: That's right. The real question is, if by Thursday there's no deal, will stock markets still be gaily rising? I think the answer is probably no.

SIMON: I was struck by a phrase in Chris Arnold's piece about the dollar being the bedrock currency for much of the world. Is that jeopardized?

NOCERA: Very much so. Treasury debt is the only risk-free asset in the world. It undergirds the world's financial system, it's in everybody money market's funds. You know, China, among many other countries, buys Treasury bills like crazy - over a trillion dollars. So, if you'd have to start factoring in risk, even if it's political risk, into our debt, you know, two things happen. The rest of the world becomes less enchanted with buying it, and our interest payments - what the government has to pay to issue that debt will rise substantially.

SIMON: Can I get you to play out your scenario about what happens if October 17 comes and there's no agreement?

NOCERA: I don't think that much will happen on October 17th. I think there's a little wiggle room. What happens on October 17th is the government loses its borrowing authority and it can only pay out the cash it has on hand. However, if we got to the end of the month and the United States missed a bond payment, I believe that you would have an event that is three, four, five, six times worse than the Lehman Brothers of five years ago. Because the banks rely on treasuries to trade with each other overnight. That's how they fund themselves. And if you take away trust in the financial system or U.S. debt, it will be cataclysmic. The banks will freeze up. There will be no borrowing. It'll be like Lehman. The stock market will go down. It has the potential to be a true out-and-out disaster.

SIMON: Does an event like this and forecast like that have the effect of concentrating the mind of not just financial planners...

(LAUGHTER)

SIMON: ...but people in Congress making these decisions. And I hear a little laugh.

NOCERA: You would think it would. And in the past, it has. I mean, as they gotten closer to the deadline, enough fear spread that they could pass something or do something or kick the can or whatever. But this time, one of the things that makes this time feel different is that there really are a lot of House Republicans who say, ah, let it default. It'll just shrink the government, will be all good. And it is an act of - I don't even know how to describe it. It's insanity.

SIMON: Yeah. Well, Austan Goolsbee, I believe, used that word. Quick last question, if we could. So, October 17th is a real deadline but you think some of the effects, potentially, will be down the road.

NOCERA: Well, October 17th is the day the United States loses its borrowing authority, so it only has cash. So, at some point you run out of cash. And, you know, the short-term effects have the potential to be cataclysmic but so do the long-term effects, in the sense that people stop trusting the dollar. You know, the dollar will lose its advantages as the world's only risk-free currency.

SIMON: Joe Nocera in New York. Thanks so much.

NOCERA: Thank you.

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