October 2, 2014

A Florida TaxWatch economic report

What the Government Shutdown & Debt Ceiling Crisis Mean to Florida

| 10/15/2013

The Debt Ceiling

While the shutdown has a substantial negative impact on Florida and other states’ economies, another significant decision is still on the immediate horizon: raising the national debt ceiling by October 17.

At its most basic level, failure to raise the debt ceiling will not allow the U.S. to meet its current financial obligations. These obligations include Social Security, disability payments, and services provided to the population such as food stamps and Medicare, and will prevent the federal government from making payments due on existing debt to domestic investors and foreign countries.

Tangible effects of the debt ceiling crisis, according to a recent report by the U.S. Treasury, include slow job growth, decreased consumer and business confidence, very volatile financial markets, and bond rating downgrades. We could expect higher interest rates on future borrowing, costing U.S. taxpayers substantial amounts of money through higher interest payments. These impacts will translate into less investment in productive capital, something necessary for higher levels of economic growth.

Whatever the political outcome of the debt ceiling crisis, financial markets are already reacting. One way to gauge the recations of the financial markets is to look at the Chicago Board Options Exchange (CBOE)’s Volatility Index, the VIX. The VIX shows the market’s expectation of volatility in the S&P 500 over the next 30 days. It’s often referred to as the “Investor Fear Gauge,” and has increased by nearly 48 percent since September 20th (see chart below).

Another measurement is the yields on one-month Treasury bills. A spike in yields on this short-term bill would be an indicator that investors are avoiding the market and only willing to purchase these bonds at significant discounts. These bonds that were, as of September 20, on the secondary market at .01 “bank discount” were trading at .15 on October 7 – a substantial discount compared to recent values.

Chart: CBOE volatility index

Tags: Government/Politics & Law, Florida TaxWatch

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