Government shutdown embarrasses U.S. but economic damage won't last

The world still runs on U.S. dollars. Foreign investors still see Treasury debt as the safest place to put their money. And foreign companies still view the U.S. as an ideal place to do business.
By PAUL WISEMAN Published: October 18, 2013
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— It's going to take a lot more political bungling to do permanent damage to America's reputation or wreck its financial markets.

The U.S. government's partial shutdown and a near-miss with a debt default were a worldwide embarrassment that distracted political leaders and likely slowed the economy.

Yet the world still runs on U.S. dollars. Foreign investors still see Treasury debt as the safest place to put their money. And foreign companies still view the United States as an ideal place to do business.

“It's a paradox,” says Eswar Prasad, a specialist in international economics at Cornell University and the Brookings Institution. “Even when the U.S. is at the center of the financial turmoil, there is no other place that investors can turn to for safety.”

Congress certainly stirred up financial turmoil the first two weeks of October with a duel over President Barack Obama's health care law.

But investors didn't panic. The yield on the benchmark 10-year Treasury note was 2.62 percent on Sept. 30, a day before the shutdown began. The prospect of a default should have driven the yield much higher. Instead, the yield barely budged. It never rose above 2.73 percent.

“I think this was a sideshow,” says Christoph Kind, head of asset allocation at Germany's Frankfurt-Trust investment firm. For all the hand-wringing in Washington about a budget crisis, Kind notes that the U.S. government's budget deficit has been sinking.

“The fiscal situation in the U.S. is improving,” Kind says. “The budget deficit is going to be below 4 percent of (the U.S. economy) this year, and it's declining steadily.”

No doubt, the standoff — which produced virtually no change in policy — dented America's image and its economy at least temporarily. The last-minute deal reopened the government and suspended the debt limit. But it set the stage for another round of brinkmanship early next year.

“We may have dodged a bullet again, but we think these episodes cumulate,” says Robert DiClemente, chief U.S. economist at Citigroup. There's a “risk at some point investors throw up their hands and say, ‘This has gone too far.'”