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Kicking the can down the road is not enough

October 14, 2013: 3:41 PM ET

Removing the immediate threat of a global recession associated with a U.S. debt default would do little to strengthen business and consumer confidence that is so critical to a strong economic recovery.

By Mohamed A. El-Erian

capitol-building-shutdown-620xaFORTUNE -- If you are a federal employee, a tourist visiting our national sites, or an investor, you've already felt the consequences of the latest Congressional theatrics. If the current deadlock continues, it is just a matter of time before the rest of the nation -- and also much of the rest of the world -- would find that this latest political debacle is more than a sad spectacle; instead, it would directly impact confidence, job prospects, and the ability to provide for family members. And this risk could materialize even if Congress gets its act together, but only does so by kicking the can down the road (as seems increasingly likely).

The immediate effects of the government's shutdown are quite well known by now. Most federal employees -- whether furloughed or not -- are receiving no pay. Government services have been reduced to a minimum, as have both private-public interactions and multi-agency initiatives.

Two weeks into the shutdown, the consequences have started to multiply.

Some federal employees are naturally tempted to slow their spending, even if they are confident that they will be paid eventually. Tourism has been hit hard in some places, starving local businesses from a normally-reliable source of revenue. Meanwhile, companies are no longer able to access a range of government services, including the verification of legal-status, thus slowing their hiring plans. Even mortgage companies are facing difficulties in confirming the particulars of actual and prospective borrowers.

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For most Americans who are not directly impacted, and for the rest of the world, these issues may seem quite distant for now. Moreover, once the federal government reopens (as it will), most of the effects would end up being both temporary and largely reversible. Yet, unfortunately, there are still reasons to worry that our economy may not bounce back as buoyant from this latest Congressional debacle. And it is not as if it was growing at a high rate and creating sufficient jobs.

With our elected representatives on Capitol Hill now combining the government shutdown with the threat of a sovereign debt default, the search for political solutions has become more short-term and partial in nature. And with a minority being particularly effective at influencing the negotiating position of the Republican party, the best that can be realistically hoped for is some clumsy agreement on stop-gap measures.

America is likely to emerge from this latest phase of Congressional dysfunction with yet another "kick the can down the road" outcome.

While removing the immediate threat of a global recession associated with a U.S. debt default -- a good thing -- this would do little to strengthen business and consumer confidence that is so critical to a strong economic recovery. Indeed, both individuals and companies may be tempted to increase their self-insurance, thus further dampening economic activity.

Our global standing would also emerge less than fully intact.

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Yes, America need not worry about being replaced any time soon as the world's superpower, the provider of the global reserve currency, and the destination for those wishing to outsource financial intermediation to what remains the most sophisticated and deepest financial system in the world. But Congress would be foolish not to recognize that it is tempting other countries to explore ways to reduce their reliance on the U.S. as the anchor for the bulk of international economic interactions (including trade, finance, and multilateral policy coordination). And this directly speaks to our overall standing in the world, thus also impacting national security.

As they pivot to yet another set of short-term solutions that risk leaving too many open issues, Congress would be well advised to watch an old Monty Python clip in which a knight (played by John Cleese) unexplainably puts himself in harm's way.

Sequentially robbed of his limbs by King Arthur, the knight refuses to come to terms with his predicament. He confidently declares "tis is but a scratch," treating each blow as just a "flesh wound." And having absurdly announced that he is "invincible," the knight is left behind immobile and irrelevant.

Congress has already seen its standing among Americans fall to record lows. By failing to decisively lift the debt ceiling and properly pass a clean Continuing Resolution to reopen government, it would inflict on the economy yet another set of self-inflicted wounds whose cumulative and collective impact cannot be easily and readily discounted.

Mohamed A. El-Erian is the CEO and co-chief investment officer of PIMCO.

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