Trouble expected

I know it is always perilous to make predictions, including about economics and government, but the politics of the moment have me very worried about what the next year will bring. In particular, with Republic control of the US House of Representatives I think there is substantial risk of a debt ceiling crisis which causes severe economic consequences or, even worse, a partial sovereign default which causes even more severe consequences.

My main area of focus has become finding a job: not a perfect job, not an inspiring job, not a job that will put my skills to the best possible use, but a job that will keep me going and reverse the accumulation of debt.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here.

9 thoughts on “Trouble expected”

  1. This is forcing financiers, lawyers and officials to focus on the unthinkable. The starting point of such contingency planning is that a sovereign default would be cataclysmic: in all likelihood stocks would plunge, borrowing costs would soar, growth would suffer and the dollar’s status as the world’s dominant currency would be shaken. Any way to avoid this series of disasters merits attention. The problem, unfortunately, is that each proposed workaround has severe—and quite possibly unworkable—drawbacks.

  2. The U.S. has never intentionally defaulted on its debt, a track record that has made its Treasury securities a safe haven for investors globally and allowed the government to borrow money at low interest rates.

    There is universal consensus that a debt ceiling breach would be a historic catastrophe. Interest rates would skyrocket and the stock market would tank. The economy would spiral into a recession, shaking consumer confidence and decimating the nation’s financial credibility on the world stage. The impact could ripple across the globe, prompting debt crunches in lower-income countries with foreign currency reserves held in a suddenly weaker U.S. dollar.

  3. More importantly still, the US Treasuries component of most people’s investment portfolios is the safest component of those portfolios. … If the federal debt were called into question in some way, or if confidence in the credit worthiness of the United States were somehow to be lost or to be substantially diminished, then pretty much every American would be immediately rendered much less valuable, so to speak. The net worth of every American would instantly plummet.

  4. What next? For investors who think there is no chance of Washington careening over the precipice, it is time to snap up t-bills at a discount and sell pointless bond insurance to the nervous. But even optimists have cause for concern. Since the Treasury would have run down its cash reserves to virtually nothing, a deal would be followed by a glut of issuance to rebuild the buffer. Even the best-case scenario would drain liquidity from the market and may push yields higher.

    The stockmarket, meanwhile, looks shaky either way. Analysts at pimco, an asset manager, note that over the past dozen years, the s&p 500 index has fallen by an average of 6.5% in the month running up to a debt-ceiling deadline—even though these have always been met. Under a default it would fare much worse. In 2013, during a previous debt-ceiling stand-off, Fed officials simulated the effects of a month-long default. They estimated that stock prices would fall by 30% and the dollar by 10%.

  5. But any prioritization of payments would be a crisis. If the debt limit binds — or prevents the Treasury from having
    enough cash to meet all of its obligations — and Treasury delays non-interest payments (which would surely be considered by some a default on those obligations), the biggest immediate effects would be chaos in financial markets and uncertainty for businesses and households.

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