Today was the first day–and may not be the last–that the markets got measurably riled by the debt ceiling battle. Traders finally let fear get the better of them and dumped stocks (and much else). Lots of people have been saying this was going to happen; and it’s only a small slice of what could happen, since there was nothing to spook the markets today other than continuing Washington gridlock. It is not like a default has come yet, or a credit downgrade. Then, we could see a mega selloff akin to the collapse of 2008.
Why do we know that the debt ceiling impasse is starting to stoke fear? Simple: We have a measurement of it. Here’s CNN Money:
One sign of the increasing worries among investors is the VIX (VIX), also known as Wall Street’s “fear gauge,” which jumped by more than 13% on Wednesday alone. The index is up nearly 20% in the past five days.
So traders have been inching towards being afraid, and today they finally gave in and ran.
Which gets me to what I don’t understand about right wing debt ceiling denial: It’s one thing to claim that President Obama and Treasury Secretary Geithner are bluffing, and the government will still be able to pay its bills after August 2. I don’t believe that, but I can see how Tea Partiers could believe it.
But even then, I don’t see how you could believe that the stock market, or the economy, will somehow survive this brinksmanship. Markets aren’t rational–they often run on rumor, and they often run on fear. In other words, it doesn’t matter whether or not you believe what Obama says. It matters what the market will do if you force the issue. And now, the market is doing it.
But of course, there will be another rationalization available to debt ceiling deniers. When the market crashes even further, and their own constituents are further damaged, they will be able to content themselves by saying, “It’s Obama’s fault.”