Dow plunge is wake-up call to deal with debt

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- Technical glitch. Violence in Greece. Historic U.K. elections. A combination of these factors sent the Dow plummeting nearly 1,000 points Thursday before regaining two-thirds of the ground lost.

But here's the thing: the market could be in for a very bumpy ride in the coming months -- except it won't have technical glitches to blame. U.S. debts, more likely than not, could be an underlying culprit.

In any case, Thursday's Dow drama should be a wake-up call that policymakers heed, said Allen Sinai, chief economist and president of Decision Economics.

The story now is Greece's debt crisis, and the fear of debt contagion to Portugal, Italy, Ireland, Spain -- and EU's neighbor, the United Kingdom.

All of that may spell trouble for U.S. exports six to 18 months from now, Sinai said.

Traders realize that, and they also realize there's a risk that the United States -- with its own large and growing stockpile of debt -- will not have financial wiggle room to address future economic weakness, Sinai said. "Everyone with money on the line knows that."

Not everyone shares the view that the shock from events in Greece could move the U.S. economy in a different direction. What happens to Europe's biggest economies matters, said Lakshman Achuthan, managing director of the Economic Cycle Research Institute. "France and Germany are not going into recession anytime soon."

Sinai stressed, however, that the risk of U.S. debt undermining confidence in the United States' ability to handle potential shocks doesn't have to turn out to be reality. "There is time to remove that risk," he said.

The swelling debt loads of several EU countries, the U.K. and the United States means there will be a lot of competition in the market to finance all that debt in the coming years. "That doesn't go away unless you take action," Sinai said.

To reduce the chances of a U.S. fiscal crisis, the action Sinai and budget hawks have been urging U.S. policymakers to take now is to put together a credible plan to stabilize federal debt that would be implemented over time.

"The longer we wait to act, the greater the number of things that could set off a crisis," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

Of course, any debt-reduction plan would need to be constructed in such a way as to not hamper economic growth or job creation, since both can also help reduce deficits.

A tall order to be sure, particularly in such a partisan environment. But it's one lawmakers will have to attempt if they want to ensure a more prosperous future than a federal balance sheet stacked with debt could ever deliver, budget experts say.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 18,232.02 -53.72 -0.29%
Nasdaq 5,089.36 -1.43 -0.03%
S&P 500 2,126.06 0.00 0.00%
Treasuries 2.22 0.03 1.37%
Data as of 4:52am ET
Company Price Change % Change
Bank of America Corp... 16.75 0.02 0.12%
Apple Inc 132.54 1.15 0.88%
Hewlett-Packard Co 34.76 0.93 2.75%
AT&T Inc 34.71 -0.36 -1.03%
Microsoft Corp 46.90 0.00 0.00%
Data as of May 22
Sponsors

Sections

Malaysia Airlines is nearly finished with its tough restructuring plan -- which will include cutting about one-third of its workforce -- in its efforts to recover after two plane tragedies last year. More

The True Cost, a new documentary, chronicles the evils of the clothing industry and asks us to stop buying so much cheap stuff More

Google filed a patent for a toy that will have sensors and cameras, and can control connected devices. More

Sarah Kauss launched S'well to rid the world of plastic water bottles. In five years, she's sold 4 million of her stainless steel bottles. More