Felix Salmon on the damage already done by the debt ceiling debate

Felix Salmon is surely a new name to many, but his incisive commentaries on finance and economics have gained him considerable influence.

In his latest opinion piece for Reuters, “The damage already done by the debt ceiling debate”, he notes that the bond markets are showing little evidence of genuine fear that the debt ceiling will not be raised or that the United States will default:

Listen to anybody on Capitol Hill, and they’ll tell you that the debt ceiling debate is turning into a complete disaster, with the Republican rank and file such an inchoate mess that it increasingly seems as though no deal will get done at all. Look at the Treasury market, however, where the 10-year bond currently yields something less than 3%, and it looks decidedly sanguine; short-term debt maturing shortly after the drop-dead date of August 2 is similarly unaffected by the news from Washington.

But the virtual certainty of an eventual deal to raise the debt ceiling does not allay Salmon’s concern that we might pay a deep price for the current political disarray:

The base-case scenario is, still, that the debt ceiling will be raised, somehow. But already an enormous amount of damage has been done: the US Congress has demonstrated clearly that it can’t be trusted to govern the country in a responsible manner. And the tail-risk implications for markets are huge. Think of the speed with which the Egyptian government collapsed earlier this year, or the incredible downward velocity of News Corporation right now. When you build up large stocks of mistrust and ill will, nothing can happen for a very long time. But when something does happen, it’s much quicker and much worse than anybody could have anticipated. The markets might not be punishing the US government at the moment. But the mistrust and ill will is there, believe me. And when it appears, it will appear with a vengeance.