Dear GOP,
Out here in America, we we’ve been debating between five options regarding the U.S. debt crisis:
Quote: Large decreases in spending.
Moderate deceases in spending.
A budget freeze with no increase or decrease.
Moderate increases in spending.
Large increases in spending.
You, on the other hand, have had a debate in Washington which included only the last two options on the list. And since Washington is an echo chamber in which the terms of the debate are initiated by government and reflected back by media, you forgot that any other options even existed. In the end, the reality-distorting effects of the echo chamber won out and we had a national debate about whether we should do the ‘responsible’ thing and obey ‘the adults in room’ and raise spending quickly, or should we instead embrace the ‘far right’ policies of the ‘intransigent’ economic ‘terrorists’ and flirt with default. So you chose to split the difference between rapid spending increases and moderate spending increases. You considered nothing resembling a freeze or even, gasp, an actual cut. Instead we got Washington cuts, that is reductions in planned increases.
Investors saw it right away. The Dow sold off badly in response to the deal. Gold went to dizzying new nominal highs, touch 1670 per ounce. The dollar rallied ever so slightly against global currencies, but that of course includes a comparison to the crippled euro. The current haven currencies, like the yen and the franc rallied. The franc hit fresh highs and the yen rallied so much that the bank of Japan intervened this week to weaken it against the dollar.
Remember what the echo chamber said? If you didn’t raise the debt ceiling, Asian markets … markets … markets would crash … crash … crash. Well you DID raise the debt ceiling and they crashed anyway.
Remember what the echo chamber said? If you didn’t raise the debt ceiling, rating agencies … agencies … agencies would downgrade … downgrade … downgrade. Well you did raise the debt ceiling and Moody’s put you on negative watch and S&P is under enormous pressure to downgrade you.
If don’t downgrade this month, then brace yourself for Thanksgiving when the ‘super congress’ finds that it is no wiser than the current ‘under congress’. Rating agencies don’t matter much anyway,: they have become the captain obvious of the risk management world. They ratify ex post facto realities. Bond spreads have already registered the fact that in the world of developed nation sovereign debt, we are middle of the pack, not riskless Olympian gods.
What did we investors see, which you rulers did not? Quite a bit, actually. But what stands out is this: you traded cash for promises. My good friend, Ron Morris, a highly successful serial entrepreneur whose most recent venture is his own business talk radio network, told me that his first rule of negotiations is to never, ever, ever trade cash for a promise. You either trade promises for promises, or cash for delivery, or if your opponent is patsy enough to go for it, you trade promises for cash. In this case, House GOP, you were the patsy.
You fell for one of the oldest tricks in the budget book. I call it The Roy Rogers – you thought Trigger would save you. But those spending triggers never work. Those Legislator’s last name, hyphen, legislator of opposite party’s last name bills which promise that if you don’t cut by some arbitrary amount, it will trigger some automatic cut of some politically unacceptable amount bills, always fail. Gramm-Rudman-Hollings springs to mind. When you see one of those hyphenated bills, look at the name on the republican side of the hyphen and you know who the pasty is (I’m looking in your direction, McCain-Feingold).
Trigger never saves the day, because no congress has the authority to bind a future one. When it’s time for the automatic Armageddon cuts to medicare and military to kick in later this year, congress will simply refuse to do it.
At least that’s what the gigantic global credit market is saying to us. The best way to measure the risk of treasury default is to compare treasury yields to various other types of bonds, including those from other counties.. The riskier the bond, the higher the yield. If we are going to lend money to you and we’re afraid you might not pay us back, then we demand a higher interest payment to compensate for the risk. I’ve spend much of this week looking at the various yields. After all of the histrionics about a global financial melt-down, when you finally did what the President and his echoes in the media told you to do, risk premiums barely moved. Spreads against other U.S. bonds moved 2 or 3 basis points (a basis point is a hundredth of a percent); spreads against other nations moved by orders of magnitudes of 12 or 18 basis points.
In other words, bond investors never believed that you would default anyway, and therefore, they don’t believe that you changed the risk by caving in. Gold investors registered their (actually our) vote that you’ve chose the path of debasement rather than default.
In other words, you’ve been had.
Bowyer is the author of The Bush Boom: How a Misunderestimated President Fixed a Broken Economy.