There is
something seriously wrong with a political culture in which no one can gain a
mandate to do the right thing out side of the president himself and only then
if he is talented at selling it and gaming the system. Since 2008, we have gridlock on economic
measures broken only by a grab for spoils.
This spectacle is steadily eroding confidence in the USA currency itself
let alone its debt instruments.
Default, if it
comes, will be a reckless act to make a political point and not because it is
impossible to avoid. The direct result
will be a huge global depreciation in asset values, serious retrenchment
lasting years even, particularly if the same set of clowns remain in charge.
In our worst
drams inspired by past failures, we always expected a rational mistake to lead
us to the brink of depression, not a deranged lack of leadership filled by
deranged posturing and excuse making. It
is like an Eagle biting its own tail.
The Economic
Consequences of a US Debt Default
The economic ignorance of the Teapublican faction of
the Republican party in the US House and Senate is perhaps exceeded only by the
similar ignorance of its economic advisers.
Appearing in the public press in recent days is the
latest ‘brilliant’ Teapublican view that a default by the US government on
paying interest on its debt would not have a negative impact on the US or
global economy.
Both the US and global economies are already slowing
noticeably, with the Federal Reserve in the US continuing to downgrade and
lower its estimates of future US growth, and the IMF doing the same for growth
rates in China and the rest of the world. The Teapublicans claim a US debt
default would not impact these already negative trends.
While it is true that the US government will not
completely run out of money with which to pay its debts on October 17, 2013, as
Treasury Secretary, Jack Lew, has publicly stated, it is equally true that it
will definitely do so sometime between October 24 and early November.
Thereafter, some funds will continue to come into the government, but not
nearly enough to pay all its bills. That will force the Obama administration to
choose between what it will pay: either bondholders who own US debt or grandma
and grandpa on social security. Teapublicans no doubt want to force Obama to
make that ‘Hobsons’ Choice’ (i.e. damned if you do and damned if you don’t).
Teapublicans will argue he should pay the bondholders first, and forego paying
social security. It’s their way to start cutting social security before they
even negotiate an official reduction in it with Obama.
To quote one Teapartyer’s statement today,
Republican Representative, Joe Barton, of Texas: “We have more than enough cash
flow to pay interest on the public debt, so there is no way we’re going to
default on the public debt unless the president of the United States
intentionally does so”.
Such statements by lesser known Teapublicans were
followed up today in the business press with an article by Teapublican notable,
Paul Ryan. Ryan made it clear that the focus of the debt ceiling discussion was
to provoke further concessions by Obama on Social Security-Medicare cuts. US
House radicals thus are attempting to put Obama in a negotiating box: either he
agree to cut Obamacare or to cut Social Security-Medicare.
What the Teapublican faction in all their economic ignorance don’t understand, however, is that the psychological effects of a default—or even a near default—on the US and global economy will prove significant. One does not have to wait for a complete default for that to happen.
What then are some of the possible impacts?
First is the prospect of rising interest rates.
Interest rates have already begun to rise, starting on a base that has already
risen since the US Federal Reserve’s bungled attempt to signal over the past
summer its intent to begin reducing (tapering) its Quantitative Easing (QE) $85
billion a month liquidity injections. That Fed ‘faux pas’ has already driven up
long term rates by more than 1%, thereby causing an abrupt halt to a very timid
US housing recovery earlier this year. In the past month banks and mortgage
servicing companies have already announced thousands of layoffs in their mortgage
departments, signaling the virtual end of that housing recovery. Further
interest rate hikes, short and long term, on top of the Fed’s recent
bungling—which will now certainly occur as the default approaches—will all but
ensure the end of any housing recovery in the US.
Short term rate increases will most likely
accelerate further throughout the month of October. That includes, in
particular, Treasury bill rates which will in turn impact other rates. ‘Other
rates’ include the critically important ‘Repo Market’ rates. Destabilizing the
repo market is a dangerous game. It is likely the locus for the next financial
crash, the analog to the subprime market that was the center of the last
financial crash. Teapublicans are thus playing a dangerous game, one that may
well in a worst case scenario precipitate another financial instability event
on the scale of 2008.
Rising interest rates also mean the end of the
latest stock price and junk bond booms. In itself, that doesn’t affect average
folks much. But the psychological impact of a rapid decline in asset prices
can, and does, spill over to consumer and business spending. That leads to
layoffs, in a US job market that is, at best, producing only part time, temp,
and low paid jobs as it is.
Rising rates and an even weaker job market in
November-December will translate into slowing consumption, which is already
showing signs of weakness in August-September. Retail sales in general will
weaken still further as a consequence of the debt ceiling default, as will an
already ‘long in the tooth’ auto sales cycle.
The negative impact of debt default on consumption
is already becoming evident in recent weeks. A Gallup Poll in recent days
showed consumer confidence dropping precipitously. While some argue confidence
surveys are typically volatile and unreliable as indicators of consumer
spending, that is not as true for abrupt and significant movements in
confidence indicators. That may now be happening, as the public begins to focus
on the dual crises events.
The recent Gallup poll in question fell to -35 from
a prior -15. This compares to -56 during the August 2011 worst period of that
prior debt ceiling debacle. During the worst period of October 2008 the index
was -66. Already falling significantly early in the current crisis, one can estimate
where the -35 current poll will be by October 17-24 should the crisis not be
resolved by then. We will almost certainly be in the August 2011 territory,
when the third quarter US GDP nearly went negative (and did so if the GDP
deflator was substituted with the CPI index for that quarter).
Globally, the approaching debt ceiling crisis has
already provoked widespread public responses by foreign governments, warning a
potential default by the US would have dire consequences for US debt holdings
and future purchases. China, Japan, and the IMF have all raised warnings in
recent days. If default occurs, then US bond rates will rise even further and
faster than at present, raising a real question whether they will continue to
purchase US Treasury debt when the price of their holdings are declining
significantly in the wake of a default.
There are also important implications of a default
(or even near default) for the Eurozone’s own current economic recovery and its
still very fragile banking system.
Yet another negative impact globally will be a
decline in Euro exports. A default situation would result in the US currency
losing value, causing a further rise in the already fast appreciating Euro
currency. That trend would challenge German and Euro export growth and
therefore that region’s tepid 0.3% last quarter’s recovery.
Another problem potentially to grow worse is the
Euro banking system. The Eurozone’s version of QE-the LTRO liquidity injection
policy of the past year amounting to more than $1.5 trillion-will soon need
another LTRO II injection by the European Central Bank in a matter of months.
In addition, more than $1 trillion of the LTRO I will need to be refinanced
soon. Nearly all the major banks in Italy, for example, have yet to repay
anything of their share of the LTRO $1.5 trillion and will need further
liquidity in coming months. Rising interest rates from a debt default in the US
will spill over to Europe, thus raising the costs of LTRO II, as well as the
financing of much of LTRO I. That will cause further fragility in the Euro
banking system and economic recovery there, especially for the highly fragile
Italian banks.
For Japan, its recent export gains would also slow,
at a time when it has decided to raise taxes while suspending structural economic
reforms.
Currency volatility in emerging markets would also intensify from a debt default in the US, likely causing a retreat once again in real growth in those markets, just a few months after their recent ‘stop-go’ provoked by US Fed QE policy uncertainties this past summer.
Throughout the past 18 months, this writer has
forewarned that a fragile US economic and global recovery-not nearly as robust
as some maintain-is susceptible to a ‘double dip’ recession in 2013-14 should
one or more of the following negative ‘tail events’ occur: first, a renewed
banking crisis in the Eurozone or elsewhere; second, significant further
deficit cutting in the US; and thirdly a continued drift upward in US long term
interest rates as a consequence of QE tapering or other events. While it
appears the Euro banking crisis has temporarily stabilized—except for Italian
banks perhaps—the deficit cutting and interest rate trajectory in the US are
very real and serious trends that may yet precipitate a descent into a double
dip condition in the US economy.
And if the Teapublican faction in the US House of
Representatives managers to prevent a resolution of the debt ceiling issue into
the latter part of October, then the economic consequences for both the US and
global economies will be severe, and may even prove sufficient to precipitate a
double dip recession in the US.
This piece was reprinted by Truthout with permission
or license. It may not be reproduced in any form without permission or license
from the source.
1 comment:
The US Government could pull the economy out of Depression by giving every household in America just $10,000 to spend as we please. Simple economics says, "The faster money changes hands the quicker the economy improves." But the Government gives all the money to the top Banksters who buy back their own stock and gamble more in Wallstreet and dirivities and lavish their top employees with bonuses. Of course the Government will never give money or anything else to help the other opressed 99% as we would go out and buy guns and ammo with this money to aid in our revolt againt this corrupt government. They want us poor, bankrupt, weak and unable to resist their tryanny. Yes you heard it from me.
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