Well, after a short “sabbatical” from writing this column, it’s time to put to paper recent follies.
While it may be tempting to, once again, berate our fearless leaders over recent events in Washington, D.C., as I’ve been doing off and on for the past two years, it’s a little bit like shooting apples in a barrel.
So, I’ll refrain. As one more voice in an already substantial chorus does little to add insight.
I can’t.
Given their behavior, an apparently split and dysfunctional Republican Congress has decided the health of the U.S. economy is not under siege.
The debate about raising the debt ceiling apparently hasn’t begun. Time has instead been spent arguing about financing the cleaning of the Pentagon and ensuring that national parks are open.
Yet, the most terrifying aspect of doing nothing is the threat to financial markets. Yes, here we go again.
Consider the worst case scenario.
Federal debt is the safest place to sock away your money (though socks may become safer).
If the U.S. defaults on its obligations, it would raise the riskiness of holding debt. With this risk comes higher interest rates.
How high? Don’t know, but there’s also the risk that holders of U.S. bonds on international markets could push yields higher, and, with them, higher rates on everything from credit cards, mortgages, car loans, etc.
Firms and households would find it expensive to borrow, confidence would fall and spending would drop.
The Fed has been unstoppable at trying to keep interest rates down for the past five years – even spooking markets when it announced a continuation of its monthly $85 billion bond-buying program last month.
But I doubt the Fed can do this much longer.
Investors pulling out of U.S. bonds could buy other currencies, raising the specter of rapid dollar depreciation.
While this would be good for exporters, countries that rely on exporting to the U.S. will see a sharp decline in global sales. And that could push them into recession, which further erodes our exports.
I think of Switzerland, which promptly went into a recession after the Swiss franc’s 50 percent appreciation between 2010 and 2011.
Then look at Greece. When the Greeks defaulted on their debt, long-term yields reached 30 percent in two years!
Thankfully, the U.S. is not Greece.
And what happens if the world’s safest financial instrument suddenly isn’t safe? I don’t think anybody really knows. Suffice to say, the financial market’s foundation would crack, which can’t be good.
And global financial markets are nervous. Since mid-September, the Dow has fallen 800 points, and the dollar has lost 5 cents against the euro. Potential signs of lost confidence.
Where do you go? Germany? China? Japan?
Paradoxically, the opposite could happen. When the financial crisis struck in 2008, the dollar got stronger and yields fell.
When S&P downgraded U.S. debt from AAA to AA, bond yields fell.
Such are the vagaries of international financial markets.
Sequestration, government shut down, and now the debt ceiling?
Better get me some more bullets, there’s still plenty of apples.
sonora_t@fortlewis.edu. Robert “Tino” Sonora is associate professor of economics at Fort Lewis College and director of the Office of Business and Economic Research at Fort Lewis College.
