Will Rogers, the american satirist once remarked ‘ All I know is just what I read in the papers, and that’s an alibi for my ignorance’
It sums up the media frenzy today on the US government going broke!
Do you really think the world’s largest economy will do that ? How hard is it for congress to raise the debt ceiling by a few more trillions when US debt ceiling has no limits? How gut wrenching is this decision for its lawmakers? Remember we went through all of this as congress raised the ceiling 10 times from 2001 with no moral qualms about the level of debt. After does it matter, if you owe 17 or 20 trillions if you are reconciled to never bothering to pay this debt in the foreseeable future?
The soothsayers are out already debating the US sovereign default in almost of of the world’s media. But will America default?
Historically, barring 1979, when a technical glitch caused the Treasury to default on $120 million of notes, there has been no defaults of US sovereign debt. After all how can you default when you own and manage the global economy’s currency of choice (US$) and your debts are also denominated in your own currency?. The worst case scenario would be printing more US$ bills to repay debts as Alan Greenspan once claimed.
If this is not the frenzy is all about, let us look at a few reasons:
The first reason is political. The BBC’s Linda Yueh has touched on the adverse effects of tightening US outward FDI on the emerging economies of Indonesia, South Africa, Brazil, Turkey and India. She calls the ‘Fragile five’. Linda argues that ‘these states have the most to lose when the US Govt restricts capital, since all of them run current account deficits and rely on capital inflow to service their repayments’ You can read the full article by Linda Yueh here.
These states have growing economies, are emerging out of their cocoons and most importantly are ‘gateways’ to geopolitical focus regions. All of these five states are facing elections in 2014. Restricting capital could strangle these economies even for a few hours and this act coupled with political instability in the states could lead to even worse effects.
The second reason is fairly straight forward. The shadow financial institutions of the global economy stand to gain the most if there is a period of uncertainty. Gold has already peaked in many regions and is unstable as we wait. Oil prices are also on the roller coaster as we wait for the Fed and Syria to make up their minds on which is the better evil. Chemical warfare or more debt.
Amid all of this chaos, the financial world makes its money and when the debt ceiling is raised, rests till another day
I could be wrong of course and we could see the largest economy default.