By Mohamed A. El-Erian
FORTUNE -- Given the rather muted market response to the government shutdown, some Republican lawmakers may be tempted to take the debt ceiling hostage next. That would be a tragedy for America. The damage would be a multiple of anything that could materialize from the government shutdown. It would be a lot more durable. And the negative consequences would be felt around the world.
While much still depends on the length of the shutdown, it is likely that most of the direct economic damage would be temporary and reversible. Public services would be resumed, furloughed employees back at work, contractors paid, and tourist sites reopened.
The lasting economic effects relate to non-recurrent and non-transferable expenditures. They involve a permanent hit to aggregate demand, lowering growth and creating fewer jobs. Fortunately, this type of expenditure constitutes a relatively small part of what has been shut down.
Because of this, markets have decided essentially to "look through" the direct demand effects. At the same time, they have been inclined to minimize the indirect impact that operates through lower consumer and business confidence.
All this could change if, instead of days, the shutdown lasts for weeks and months. In the meantime, some Republican members of Congress may feel that they have stumbled on a seemingly neat strategy: that of getting maximum media exposure and leverage, and with limited permanent damage. Indeed, they could even be tempted to take the debt ceiling hostage next.
According to the Treasury, the U.S. will come very close to the debt limit in about two weeks. If it does, and if Congress fails to act, the country would immediately face two very unpleasant options: default on its debt obligations or run a balanced budget (and with very limited cash flexibility); over time, this second option would converge to the first.
The exact costs of a debt default are hard to determine. Yet there are valid reasons to believe that they would be big, consequential, and durable for current and future generations of Americans.
Neither the domestic nor international financial systems are wired for the possibility that the most powerful economy in the world would become irrational in how it runs its finances. Instead, they are wired on the reasonable assumption that, as the issuer of the global reserve currency, America avoids extreme irresponsibility.
The resulting inter-linkages and network effects mean that a U.S. sovereign default would result in a series of legal triggers that would transmit the disruptions to many other financial markets. Multiple credit rating downgrades would occur. Credit flows would be dislocated. Companies and individuals would suffer, destroying growth, jobs, and livelihood.
Then there are the global effects.
A U.S. default would immediately reverberate around the globe, just like the disorderly collapse of Lehman did in 2008-09. Suddenly, the world would again tip into recession, facing also the threat of a great depression.
No one in their right mind would even consider playing Russian roulette with the full faith and credit of the government of the most powerful economy in the world.
Let's hope rationality returns to the extreme factions of the Republican party. The alternative is really far too awful to contemplate.
Mohamed A. El-Erian is the CEO and co-chief investment officer of PIMCO.
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