This is an article from Bill Fisher- I thought it interesting.
As this is written, members of both political parties are busy thinking up different debt reduction formulas that might conceivably prove acceptable to enough in our Congress to gain passage and take us on a strange detour around the messy experience of defaulting on our national debt.
But we are fooling ourselves if we think that cleverly side-stepping the default will allow us to pass through this economic soap opera unscathed. In truth, some damage has already been done.
It comes down to this. America has for many years held a privileged position in world credit markets and, by extension, in the world economy. Specifically, its debt—i.e., Treasury securities—have been the benchmarks for interest rates all over the world. Because American debt was backed by the full faith and credit of the United States, those who invested in Treasury securities believed that theirs was the safest investment available (short of, perhaps, gold), and those who set interest rate yields for other investments used Treasury yields as the guide to today’s other viable yields. Thus, for example, the 30-year fixed-rate has keyed itself to the yield on the 10-year Treasury note, with a margin of roughly 1.5% separating the two.
In other words, Treasury security yields created the goal posts and out-of-bounds marks for the world’s economic games. Without them, we don’t have referential guides for many of the important interest rates we use—even those for the simplest of borrowings.
You can see, therefore, that any damage done to Treasury securities as the basis for economic transactions pushes the markets in the direction of chaos. “No problem,” some self-styled analysts declare. “They’ll get over it.”
But what damage will be done in the meantime? Will the dollar still be the currency in which oil purchases are denominated? Will the dollar still be the main reference for most international trade? And here’s the truly big question: Will we still be capable of creating money from thin air? It’s one of the main things that has differentiated, say, American financial problems from those of Brazil, Argentina, Portugal and Greece. They can’t hide behind currency maneuvers; we can.
Are we, in our inability to reach an agreement that will raise our debt ceiling and begin to lower our burdensome national indebtedness, giving up far more than we seem to realize? The nation whose sovereign currency stands as the benchmark for world financial transactions must treat its position with care and respect. But at present, we’re not.
The damage could be far-reaching and long-lasting.
If, as is likely, the credit rating agencies dock the nation’s sovereign credit rating even slightly, investors are almost certain to demand a higher yield on Treasury securities. Our interest rates—including mortgage interest rates—will surely rise as a result…and our economy can ill afford that. Especially the real estate market.
Interest rates are waiting rather generously and patiently as Congress thrashes about, seeking some agreement—but sadly, the only obvious agreement thus far is that no one agrees on anything. People are arguing and voting for principles, rather than for actual pragmatic solutions, and we’re still very far from legislation to raise our debt ceiling and start trimming our national debt. It is getting more and more difficult to imagine pulling a stopgap bill out of a hat, even with a viable program being suggested by the so-called “Gang of Six.”
My point remains, though. Pandora is out of the box. The world can no longer be certain that Congress will give our nation’s debt obligation the rather hallowed priority it needs if we are to continue to generate benchmark interest rate yields and to maintain the privilege of creating money from thin air. And rising rates may result, no matter what Congress does at this point.
by: Bill Fisher
