Deutsche Bank’s Jain on default: This would be a fatal disease. How bad is it?

Anshu Jain also said that the US default would be utterly catastrophic.  Could you please shortly explain if you agree with him or not, and why?

Kati Suominen, Adjunct Professor, Global Economic Management Group, UCLA Anderson School of Management

I do agree with him. The repercussions of US default can be far-reaching. My sense is that just like the implosion of Lehman Brothers five years ago, we are not even able to anticipate or quantify the chain reactions that would be caused by the default.

The issue is not only about financial markets and value of US debt – the shutdown is undercutting world trade and US competitiveness. One reason is that many US exports and imports from food to advanced technology products and chemicals require regulatory approvals to cross borders that short-staffed government agencies cannot provide. If US exporters cannot serve their customers, they will end up losing global market share. The millions of businesses exporting goods into the US are also hurting.

Besides, the mere impasse in Washington is already undermining confidence in the US and hurting the US economy, right when job-creating and economic recovery are most needed.

The heart of the matter of course is not the debt ceiling; it is the quantum of debt that we have accumulated. The best outcome of the current impasse is a reduction of US debt loads both through spending cuts and vigorous economic growth, which quickly boosts tax revenues. The risk is that Washington is to divided to enact measures to substantially reduce debt loads – in which case we risk talk about default many times in the coming years.

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