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It’s beginning to feel a little like that great film, Groundhog Day, starring Bill Murray and Andie MacDowell
But the current Fiscal Groundhog day is no comedy. According to the great Karl Marx, who said "History repeats itself, first as tragedy, second as farce", it is more likely to be a farce.
Six years ago America blew up the world’s financial system thanks to its subprime mortgage mess. And now America is threatening the world’s financial system all over again. The budget and debt
ceiling deal done this week was just a temporary sticking plaster. After more than two years already of this on-going Washington war, we shall be back again in January and February. Once the plaster is ripped off, the festering political wound will be revealed again.
And even America’s friends are starting to get impatient and angry as this time the financial threat from default is by choice. Thanks to the first American led financial crisis, many non-US banks had to be bailed out by their respective governments and therefore taxpayers. Threatening default puts those taxpayers on the line again because of the immense damage a default would wreak in the global banking system.
Already the economic impact will be affecting the rest of the world too. The US recovery has been sluggish partly thanks to the automatic spending cuts forced on the country. The ongoing uncertainty must be impacting on both consumer and business spending. And of course inward investment is hardly going to be boosted by default risk. As the world’s largest economy that will be affecting output in countries all over the world as well, although by quite how much is almost impossible to determine.
Half of all Treasuries are owned by foreigners. China alone owns around $2tn. Beijing has been throwing warning shots across America’s bows during this crisis but this week it got particularly close, talking of the need to “De-Americanise” the global economy. Beijing also called for the introduction of an alternative global reserve currency.
And this is the killer. America benefits substantially from the dollar’s dominance. And at the moment, there really is not much alternative. The euro has its own troubles and the renminbi is not freely floated. But neither of these situations is likely to last. America should not take the dollar for granted.
America also benefits from Treasuries being regarded as the global risk free bond. This ensures America benefits from having one of the lowest global borrowing costs. Thanks to the Fed, most yields have remained low throughout the crisis. But the rapid rise in bill yields I highlighted last week, could be replicated in longer maturity bonds if default risk started to be priced in and the Fed wasn’t manipulating the market.
The market reaction to the Washington mess was described as being “muted” with the S&P 500 actually up a few percentage points during the 16 day shutdown with a small relief rally after the deal was done. But that belies the real situation. Thanks to Washington, America is doing serious damage to itself and the longer the impasse continues the greater that damage will be.
The muted market reaction (thanks to the Federal Reserve’s endless QE) is also dangerous. Firstly, it prohibits the markets pricing in greater risk and forcing the political class back to the negotiating table. But secondly and more dangerously is that it allows the political class to disregard or mitigate the threat of default.
I read some where a quote “Problem is not the default, but DC over spending leading us down the road to ruin”. To reiterate these words, “the problem is not default”. That shows an alarming
level of financial illiteracy and disregard for the consequences of non-payment. I am no longer shocked at the financial illiteracy of the political class. But such a casual disregard for the world’s largest economy to consider not paying its bills is truly terrifying. I fear that the lack of market reactions will persuade the extremists that default is a viable option to achieve their political ends.
In fact the lack of market reaction in equities, forex and longer dated bonds markets reminds me of
the Aesop’s Fable of the Boy Who Cried Wolf. The financiers have been rolled out day by day to warn the political classes of the extreme danger of default. And yet markets barely noticed. That makes me fearful that the financier’s warnings will be ignored next time. The financiers are the shepherd, supposedly constantly giving false alarms and Washington, the villagers that ignore the
cries for help.
The structure of the American political system demands compromise from its political appointees. It has two chambers of law makers – the House of Representatives and the Senate – it has a powerful President with veto power and it has mid-term elections. There is also the legally imposed debt limit, rare in most countries. All this ensures that parties need to work together. My message to Americans is that if you elect politicians who refuse to compromise, you threaten financial Armageddon.
Jack Lew at the Treasury handled the threat of default perfectly. He didn’t tell Washington exactly when a default would occur, or what the plans where in the event of a crisis. Whether he can manage such a fine balancing act again is another matter.
And my final thought is that most in Europe just do not understand that this row is over the Affordable Care Act. Europeans cannot see how anyone could be against universal healthcare which in Europe is a basic human right. The maternal mortality rate is worse in America than Iran, Bahrain, Turkey, Puerto Rico and South Korea according to the CIA data. For the world’s richest country to rank 47th in the world for the probability of a women dying during pregnancy or birth should be a humiliation to the nation and a driver for universal healthcare. The fact that it is not, is utterly bewildering to most outside its borders.
Italy is often laughed at for its dysfunctional political process, its inability to form governments that can actually govern and the quality of its elected leaders. But at the moment America’s political situation is looking remarkably similar and that is a comparison that doesn’t ever want to made about your country.
But the current Fiscal Groundhog day is no comedy. According to the great Karl Marx, who said "History repeats itself, first as tragedy, second as farce", it is more likely to be a farce.
Six years ago America blew up the world’s financial system thanks to its subprime mortgage mess. And now America is threatening the world’s financial system all over again. The budget and debt
ceiling deal done this week was just a temporary sticking plaster. After more than two years already of this on-going Washington war, we shall be back again in January and February. Once the plaster is ripped off, the festering political wound will be revealed again.
And even America’s friends are starting to get impatient and angry as this time the financial threat from default is by choice. Thanks to the first American led financial crisis, many non-US banks had to be bailed out by their respective governments and therefore taxpayers. Threatening default puts those taxpayers on the line again because of the immense damage a default would wreak in the global banking system.
Already the economic impact will be affecting the rest of the world too. The US recovery has been sluggish partly thanks to the automatic spending cuts forced on the country. The ongoing uncertainty must be impacting on both consumer and business spending. And of course inward investment is hardly going to be boosted by default risk. As the world’s largest economy that will be affecting output in countries all over the world as well, although by quite how much is almost impossible to determine.
Half of all Treasuries are owned by foreigners. China alone owns around $2tn. Beijing has been throwing warning shots across America’s bows during this crisis but this week it got particularly close, talking of the need to “De-Americanise” the global economy. Beijing also called for the introduction of an alternative global reserve currency.
And this is the killer. America benefits substantially from the dollar’s dominance. And at the moment, there really is not much alternative. The euro has its own troubles and the renminbi is not freely floated. But neither of these situations is likely to last. America should not take the dollar for granted.
America also benefits from Treasuries being regarded as the global risk free bond. This ensures America benefits from having one of the lowest global borrowing costs. Thanks to the Fed, most yields have remained low throughout the crisis. But the rapid rise in bill yields I highlighted last week, could be replicated in longer maturity bonds if default risk started to be priced in and the Fed wasn’t manipulating the market.
The market reaction to the Washington mess was described as being “muted” with the S&P 500 actually up a few percentage points during the 16 day shutdown with a small relief rally after the deal was done. But that belies the real situation. Thanks to Washington, America is doing serious damage to itself and the longer the impasse continues the greater that damage will be.
The muted market reaction (thanks to the Federal Reserve’s endless QE) is also dangerous. Firstly, it prohibits the markets pricing in greater risk and forcing the political class back to the negotiating table. But secondly and more dangerously is that it allows the political class to disregard or mitigate the threat of default.
I read some where a quote “Problem is not the default, but DC over spending leading us down the road to ruin”. To reiterate these words, “the problem is not default”. That shows an alarming
level of financial illiteracy and disregard for the consequences of non-payment. I am no longer shocked at the financial illiteracy of the political class. But such a casual disregard for the world’s largest economy to consider not paying its bills is truly terrifying. I fear that the lack of market reactions will persuade the extremists that default is a viable option to achieve their political ends.
In fact the lack of market reaction in equities, forex and longer dated bonds markets reminds me of
the Aesop’s Fable of the Boy Who Cried Wolf. The financiers have been rolled out day by day to warn the political classes of the extreme danger of default. And yet markets barely noticed. That makes me fearful that the financier’s warnings will be ignored next time. The financiers are the shepherd, supposedly constantly giving false alarms and Washington, the villagers that ignore the
cries for help.
The structure of the American political system demands compromise from its political appointees. It has two chambers of law makers – the House of Representatives and the Senate – it has a powerful President with veto power and it has mid-term elections. There is also the legally imposed debt limit, rare in most countries. All this ensures that parties need to work together. My message to Americans is that if you elect politicians who refuse to compromise, you threaten financial Armageddon.
Jack Lew at the Treasury handled the threat of default perfectly. He didn’t tell Washington exactly when a default would occur, or what the plans where in the event of a crisis. Whether he can manage such a fine balancing act again is another matter.
And my final thought is that most in Europe just do not understand that this row is over the Affordable Care Act. Europeans cannot see how anyone could be against universal healthcare which in Europe is a basic human right. The maternal mortality rate is worse in America than Iran, Bahrain, Turkey, Puerto Rico and South Korea according to the CIA data. For the world’s richest country to rank 47th in the world for the probability of a women dying during pregnancy or birth should be a humiliation to the nation and a driver for universal healthcare. The fact that it is not, is utterly bewildering to most outside its borders.
Italy is often laughed at for its dysfunctional political process, its inability to form governments that can actually govern and the quality of its elected leaders. But at the moment America’s political situation is looking remarkably similar and that is a comparison that doesn’t ever want to made about your country.