Sunday was a nervous day for economy watchers as gold hit a record and we waited for Asian markets to open. On Sunday evening, equity futures were already down 1 percent. And while Wall Street has pulled back from its worst losses this morning, the message is clear. The unnecessary gridlock over raising the debt-ceiling in Washington is having that fall-of-2008 feeling all over again. Watch for a wild ride this week as we close in on the August 2 deadline for technical default (the government has been hitting the debt ceiling for several weeks, but the Treasury Department has been using various maneuvers to keep government payments going).
This is an entirely self-inflicted wound over a made-up “crisis.” Raising the debt ceiling is routine; it was done 18 times alone during Ronald Reagan’s presidency. America does not face an immediate or even near-term government debt or deficit crisis. We borrow in our own currency, which also happens to be the world reserve currency, an invaluable advantage. Treasury securities have been selling and interest rates have not skyrocketed. What Paul Krugman calls “the bond vigilantes” have not pounced. This is a political event created by congressional Republicans, pursuing an agenda based on theory — its only application in the real world resulted in the severe 1937 recession — and the desire to cost President Obama the 2012 election. (To be fair, in 1930-32, congressional Democrats were in no hurry to help Herbert Hoover, either).
Nevertheless, as August looms, a month of historic calamities, the political theater is rapidly becoming reality in the markets.
The ratings agencies are threatening downgrades. (One can imagine what would have happened to these corrupt enablers of the financial panic were LBJ president, but then one can also dream of the results after John Boehner was on the receiving end of “the Johnson Treatment.”) China, which holds $1.5 trillion in U.S. government debt, is watching in silent horror. Americans will be the biggest losers. We own 68 percent of our own debt. And average investors are facing another potential stock market collapse.
The House couldn’t really be this destructive, especially after Mr. Obama has repeatedly rolled over. Could it? The markets aren’t sure. They are also mindful that given slow growth and high unemployment, any deal that includes draconian cuts will risk a double dip.
Oh, did I mention that corporate profits are the highest in four years?
Today’s Econ Haiku:
France and Germany
Fight to save the Eurozone
Breaking up is hard