Running out of time and faith in markets

We are now one week away from the US government defaulting on its debt. As everyone knows this crisis arose because Congress passed a set of laws for the US to carry out — namely, spending more than it takes in in revenue — and now that same Congress will not authorise one means — to be sure the primary means — of making up the shortfall, borrowing. This they do on the mantra of ‘good fiscal management,’ ie., not getting too large a debt as to cause a future problem when people refuse to lend to them. In the process, they may ruin the world economy. If I were to explain this to my children I would put it thus: “people are stupid. Really stupid.” I can’t explain this to my children. I’ve spent the better part of a month not explaining it to myself.

But to step back for a moment, we should appreciate just how ludicrous the situation is. It is pretty clear that all this is being caused by brinkmanship (and that is the kind way of putting it) on the part of the Republicans. The want to ‘win’ at all costs. But, in the process, they have admitted a fundamental lack of faith in markets. If I had a legitimate reason to spend more than I earn (and this is something that I have done on a long-term basis as have most of you), then I would pursue that. If the people who might lend me money to allow this to happen, decided that I was a bad risk, then I would be forced to do something else. But if they lend me money, they have assessed the risks and decided that that is a good transaction.

The exact same reasoning applies to the US Government. The market has decided that they are a good risk understanding fully their spending and taxing behaviour, their politics and their growing debt. In fact, the market continues to believe this despite all we are seeing now. So to not accept greater debt on the basis of some possible future problem is to form a belief that the market has poor judgment on that very same equation. In other words, they are saying “if we borrow now, then in the future the market may refuse to lend to us. So we will bring that situation forward right now and refuse to borrow from the market. So there.”

6 thoughts on “Running out of time and faith in markets”

  1. Do you honestly think this crisis has been brought about by Republicans eleventh hour conversion to fiscal rectitude? You surely can’t be that naive. The Republicans are simply pursuing a game of chicken with a Democratic president. They are willing to drive off the cliff based on the knowledge that Obama hasn’t stood up to them yet.


  2. It’s just politics. It wouldn’t be the first time politicians said or did things that almost leads to mutually assured destruction. Case in point, Cuban missile crisis.


  3. Isn’t that a bit like relying on the bank to assess how much you can spend on a home?  Not that I believe that tea party rebublicans have access to better information that the market does (which is the issue with the bank analogy). Investmenet in assets would be a reasonable reason for accumulating debt but I wasn’t aware of any nation building activities in the U.S certainly not any trillion dollar nation building activities


  4. My theory is that this is an attempt by mainstream Republicans to discredit the Tea Party wing by giving them what they asked for – a massive cut in government spending. Probably by 44% to stay within the debt ceiling.
    So on August 2nd the US government will delay payment of social security cheques and soldier salaries. Chaos will ensue, the Tea Party will be discredited, and congress will pass a compromise deal that cuts spending and closes tax loopholes.


    That’s a good point, one I haven’t heard anyone else make. There is clearly a hypocritical attitude to the markets on the part of the US republicans.  
    A typical retort would be: “What does the market know about debt?  It couldn’t even see the subprime mortgage mess until it was too late”.  This is a common ‘catch all’ argument used to refute any authority. “Economists say that the government should stimulate the economy in a recession?  What do economists know – they couldn’t even see the global financial crisis of 2008 until it was too late”.


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