Local financial expert: Default would lead to global recession

Published: Monday, October 14, 2013 at 10:45 p.m.
Last Modified: Monday, October 14, 2013 at 10:45 p.m.

As Congress’ Thursday deadline to raise the U.S. debt ceiling nears, local financial experts are concerned by the uncertainty inherent in the “Will-they-or-won’t-they?” drama dominating news outlets and coffee-break conversations.

Elias Dinopoulos, a University of Florida economics professor, doesn’t expect Congress to decide not to raise the debt ceiling, but he worries it will approve short-term fixes that will continue to breed uncertainty about the country’s financial future.

If Congress doesn’t raise the debt ceiling, he thinks it will lead to a global recession. Unemployment rates in the country would go up and businesses won’t want to invest in the U.S. Everyone is aware of that risk, he said, which is why he thinks the elected officials on Capitol Hill will eventually come together to raise the debt ceiling. He recognizes, however, the possibility that they won’t.

“But from the point of view of economics, I don’t think it makes any sense whatsoever to be shooting ourselves in the foot, and this time in the heart,” he said.

Dinopoulos is concerned Congress might drag out the situation by authorizing short-term increases for the debt ceiling, such as on a month-to-month basis, for

a while.

That will create tremendous uncertainty over whether the U.S. will go into default, and uncertainty is bad for investment, he said. It will make overseas companies wary of doing business with the U.S. and could negatively impact the value of the dollar as well.

“You cannot play with the financial markets with the debt ceiling,” he said. “This is something the politicians cannot do. They’ll regret it.”

Al Cockrell, a certified financial planner with North Florida Wealth Advisors, shares Dinopoulos’ concern over the possibility that Congress could decide not to raise the debt ceiling. Allowing the U.S. to default on its debt would be “very, very, very bad,” he said.

However, Cockrell said the ongoing government shutdown and debate over the debt ceiling hasn’t had a significant impact on the strategies of his clients.

“Most of our clients have a very long-term view, and I think for people that do have a very long-term view this is really just noise,” he said.

The shutdown has had a bigger and more immediate impact on furloughed federal employees who live paycheck-to-paycheck or people who run businesses that depend on government operations running normally, he said.

One way the debt ceiling debate has impacted North Florida Wealth Advisors is in its approach to bonds. In recent months, the company has suggested its clients invest in bonds with shorter maturities rather than long-term bonds that don’t mature for years.

It started that approach in the hopes that the country’s economy was improving. However, the uncertainty over whether Congress will raise the debt ceiling makes that an even more attractive strategy, Cockrell said, since bonds with shorter maturities aren’t hurt as much as longer-term bonds are by fluctuating interest rates.

“I certainly hope that they raise the debt ceiling,” he said.

Contact Morgan Watkins at 338-3104 or morgan.watkins@gainesville.com.

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