Now you're worried, fears rise on credit default

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With the risk of a default on Treasury debt rising by the hour, the relative indifference among Wall Street, businesses and consumers to the political dogfight in Washington is shifting to high anxiety.

Attitudes are less Meh, been there, done that, and more: OMG, this could be for real!

The level of uncertainty is on the rise, according to an index created by Stanford University economists who track the impact of policy uncertainty on business and the economy.

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It is a sharp reversal. Until this week, the level of uncertainty had been lower than it's been for much of the last two decades, But the index is rising fast—and that could spell trouble for any already weak economy in the months ahead if the level of uncertainty continues to rise.

"In August, everyone was asleep and Congress was out, and in September things were left until pretty late in the game," said Nicholas Bloom, one of the creators of the Economic Policy Uncertainty Index. "But the daily index has been surging" in the days leading up to Tuesday's government shutdown, he said.

Until the reality of that government shutdown began to sink in, the index had been languishing, far below peak levels reached in July 2011, when petty partisan bickering over the debt ceiling sent the Treasury to the brink of default.

That recent relative calm about the prospect of budget chaos may have resulted from a deepening numbness to "fiscal cliff" foolishness and "sequestration" stupidity. Bloom likens the response to a kind of fiscal roller coaster ride.

"Once you have survived a couple of these, the next one seems much less scary," said Bloom. "On a roller coast, as you climb the first hill you have a huge fear ahead of what going to happen. But after you've been through two or three, the fourth one isn't so scary. That's what happening now. We've kind of become accustomed to this."

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The low level of anxiety about the looming debt ceiling standoff may also be underpinned by the belief that the results would be so catastrophic that even the most irrational, diehard congressional ideologues realize they can't actually go through with threats to force the Treasury to default.

"The logistical disruptions (of a default) are so enormous to me that's it's reason enough they'll be forced to come to a deal," said Peter Boockvar, chief market analyst at The Lindsey Group, an economic advisory firm. "The debt ceiling is a big deal but it's not going to end up (happening) because I don't think we're going to trip over that wire."

Stocks sold off on Monday as the congressional game of chicken over the federal budget reached its conclusion, with House Republicans insisting on delaying the 3-year-old health-care law as a condition for letting the government continue to operate. Once the shutdown was confirmed, the market began moving higher again.

To be sure, businesses and investors have plenty of other things to focus on, from the recent decision by the Fed to keep its foot on the monetary gas pedal to the cloudy outlook for the holiday shopping season and the latest economic data.

Uncertainty over the duration of the government shutdown only increases uncertainty about that economic data, though. That's because most government workers who track new jobs, changes in gross domestic product and thousands of other data have been sent home. (It's not clear whether Friday's widely watched monthly employment report will be released on time: a call to the Bureau of Labor Statistics was handled by an answering machine saying the department was closed.)

The dearth of data could also cloud the Federal Reserve's policy decision making—though the central bank's interest rate committee will meet as scheduled this month to help provide a little more clarity. (The Fed isn't affected by the shutdown because it pays for its own operating expenses out of revenues generated from interest on U.S. Treasurys and other debt holdings in its vaults.)

Economists have long kept a close eye on levels of market and consumer anxiety, tracking measures like the VIX, an index of stock market volatility, or surveys of consumer sentiment. The so-called Misery Index tracks the pain of high inflation and unemployment. The Uncertainty Index, though, is specifically designed to track uncertainty about government economic policies—the kind of ambiguity amplified by this week's government shutdown.

The index—compiled by an army of Bloom's Stanford students—relies on three sources of information: newspaper coverage of policy-related economic uncertainty, the number of federal tax code provisions set to expire in future years and disagreement among economic forecasters.

When they crunched the data, Bloom and his colleagues, Stanford economist Scott Baker and University of Chicago economist Steven Davis, found that before the Great Recession struck in 2007, the index moved in a relatively narrow range, spiking on fairly obvious events like wars, elections or stock market corrections.

Since the recession, those spikes have become more pronounced, culminating in the all-time policy panic high of July 2011, when dithering over the debt ceiling sent the government to the brink of default. That month, the index surpassed a string of other high anxiety nail-biters, including two Gulf Wars, Y2K, the Sept. 11 terrorist attacks and the 2008 collapse of Lehman Brothers.

(Read more: 143-year-old law puts fear in officials during shutdown)

Bloom says the link between rising uncertainty and falling economic growth is fairly easy to understand.

"When businesses are uncertain about taxes, healthcare costs and regulatory initiatives they adopt a cautious stance," he and his colleagues wrote in a paper outlining their findings in May. "Because it is costly to make a hiring or investment mistake, many businesses naturally wait for calmer times to expand. If too many businesses wait to expand, the recovery never takes off.''

As they've tracked the ups and downs of the index over time, the researchers also found that it does a pretty good job of foreshadowing changes in economic growth and employment in the following months.

And they say they've been able to quantify the impact of policy ambiguity on economic growth. Restoring policy clarity to prerecession levels would boost industrial production by 4 percent, add 2.3 million jobs and lower the currently unemployment rate, which stands at 7.3 percent, by 1.5 percentage points, the researchers found.

Other economists have reached similar conclusions, including Moody's Analytics Chief Economist Mark Zandi, who testified before the Senate Budget Committee last week as Congress was trying to wrangle rogue House members into voting to keep the government open.

"Political uncertainty constrains business investment, especially on research and development, and reduces hiring and slows GDP growth," he said.

Based on his analysis, Zandi figures the rise in political uncertainty since the recession has drained close to $150 billion from gross domestic product, held back the creation of 1.1 million new jobs and added 0.7 of a percentage point to the jobless rate.

"If not for the logjam in Washington, the economy would now be much closer to full employment," he said.

(Read more: Hank Paulson: Tea party 'hijacked the debate')

Some economists dispute the theory that uncertainty is the economic bogeyman scaring away growth. The main element missing from the current economic recovery, they argue, is stronger demand for goods and services.

"If the problem wasn't aggregate demand you should see firms using their existing resources much more intensely—and you don't see that," said Northwestern University economist Lawrence Christiano. "In the U.S., you have a big drop in employment and also in average hours worked—suggesting the problem is really a constraint on the demand for the firms' output—and not for its unwillingness to hire."

Bloom acknowledges that policy uncertainty isn't the only force holding back the recovery—and may only be a contributing factor. But it's most frustrating to investors, businesses, and consumers watching the budget spectral play out in Washington, he said, because it's such a needless, self-inflicted wound.

And while Americans may have grown somewhat immune to the next bone-headed policy gridlock in Washington, they may have simply adjusted to a more permanent sense of pessimism and paralysis, said Bloom.

"It's become part of the background music rather than occasional pangs of fear," he said. "It's like living in Northern California—we get occasional earthquakes, but even though we've not had a large quake in almost 20 years, we live in permanent fear of the next big one."

By CNBC's John Schoen. Follow him on Twitter @johnwschoen.