So, I've been asked by several acquaintances and friends to explain how a financial meltdown would evolve if the Republicans continue their game of financial chicken over funding Obamacare. I'll make this short and sweet.
Let's start with some basic Funding American Government 101 ...
As long as we have budget deficits (and a national debt) in order for the United States to function we need to borrow money to fund our activities and pay the bills. The money that is lent to the U.S. government comes from many sources. It comes from places as diverse as the Chinese government and oil producing countries like Saudi Arabia, to ordinary Americans and financial institutions. As long as these groups have confidence in the United States, and keep "investing" in America by lending the government money - by purchasing U.S. Treasury bonds - we're OK.
When these groups no longer have confidence we have a problem. As Jim Grant, founder of Grant's Interest Rate Observer, noted, "Financial markets are all confidence based. If that confidence is shaken, you have a disaster."
Why would that disaster come about if we continue this shutdown nonsense, you ask? While I'm oversimplifying below, what we're looking at are four interconnected developments.
This is why this story from today is significant.
It appears that Fidelity Investments has lost confidence that the U.S. will be able to pay off its short-term bond obligations (due next week). So they sold all of the U.S. government bonds they held that were supposed to pay out next week. They are clearly worried about the short-term impact that a default (or non-payment) would have on the United States and their investors.
The bonds were purchased by by Bill Gross' Pimco, which is a vote of confidence of sorts. Gross is confident that Janet Yellen, the new Federal Reserve Chair, will continue to artificially prop up the economy (i.e. quantitative easing policies), which was the hallmark of her predecessor Ben Bernanke.
The Chinese, who hold $1.28 trillion in U.S. bonds, are confident too ... but in a threatening kind of way. Chinese vice-finance minister Zhu Guangyao warned, "The U.S. is clearly aware of China's concerns about the financial stalemate [in Washington] and China's request for the U.S. to ensure the safety of Chinese investments." Reading between the lines, the Chinese are saying "protect our investments or there's going to be trouble down the road."
While the Chinese might not be in the financial position to carry out their weakly veiled threat today, the reality is our GOP-led Congress is clearly playing with fire.
- Mark
UPDATE: In the FYI category, the actual forces behind the meltdown might come from developments like these ...
Let's start with some basic Funding American Government 101 ...
As long as we have budget deficits (and a national debt) in order for the United States to function we need to borrow money to fund our activities and pay the bills. The money that is lent to the U.S. government comes from many sources. It comes from places as diverse as the Chinese government and oil producing countries like Saudi Arabia, to ordinary Americans and financial institutions. As long as these groups have confidence in the United States, and keep "investing" in America by lending the government money - by purchasing U.S. Treasury bonds - we're OK.
When these groups no longer have confidence we have a problem. As Jim Grant, founder of Grant's Interest Rate Observer, noted, "Financial markets are all confidence based. If that confidence is shaken, you have a disaster."
Why would that disaster come about if we continue this shutdown nonsense, you ask? While I'm oversimplifying below, what we're looking at are four interconnected developments.
1. CONFIDENCE: Investors who rely on the steady interest income that comes from purchasing U.S. Treasury notes will be hurt because we're no longer making payments. They will demand higher interest rates as compensation, or simply disappear.
2. HIGHER COSTS: In order to attract investors companies will have to raise interest rates to compete with U.S. Treasury notes, thus driving up the cost of doing business. So, yeah, both the federal government and the private sector would have to pay higher rates.
3. DOLLAR INSTABILITY: The U.S. dollar, once the financial anchor of the global community, will come under attack as investors continue to lose confidence in the dollar. Currency wars could emerge.
4. FINANCIAL DISASTER: With an already weakened economy, what we're really looking at is the re-ignition of a major recession in the U.S. and around the world, which could slide into a depression of apocalyptic proportions.
This is why this story from today is significant.
It appears that Fidelity Investments has lost confidence that the U.S. will be able to pay off its short-term bond obligations (due next week). So they sold all of the U.S. government bonds they held that were supposed to pay out next week. They are clearly worried about the short-term impact that a default (or non-payment) would have on the United States and their investors.
The bonds were purchased by by Bill Gross' Pimco, which is a vote of confidence of sorts. Gross is confident that Janet Yellen, the new Federal Reserve Chair, will continue to artificially prop up the economy (i.e. quantitative easing policies), which was the hallmark of her predecessor Ben Bernanke.
The Chinese, who hold $1.28 trillion in U.S. bonds, are confident too ... but in a threatening kind of way. Chinese vice-finance minister Zhu Guangyao warned, "The U.S. is clearly aware of China's concerns about the financial stalemate [in Washington] and China's request for the U.S. to ensure the safety of Chinese investments." Reading between the lines, the Chinese are saying "protect our investments or there's going to be trouble down the road."
While the Chinese might not be in the financial position to carry out their weakly veiled threat today, the reality is our GOP-led Congress is clearly playing with fire.
- Mark
UPDATE: In the FYI category, the actual forces behind the meltdown might come from developments like these ...
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