J. BROOKS SPECTOR must have eaten a bad bit of fish because he awoke in a cold sweat and wrote the following cautionary tale for the edification of readers.
The world’s financial markets opened first in East Asia, of course, because of the International Date Line. The Tokyo, Shanghai, Seoul and Hong Kong exchanges were the biggest ones, but the smaller exchanges in Bangkok, Manila, Sydney, Jakarta, Singapore and Kuala Lumpur exchanges all took their cues from the big boys – in good times as well as bad.
As evening on October 16 slipped over into the early hours of the 17th and it was clear there would be no debt ceiling measure passed by both houses of Congress and signed into law by President Barack Obama before midnight, panic selling infected one exchange, one right after the other.
The images on the various international satellite and cable news services didn’t help, of course. All those visibly exhausted, angry congressmen, senators, and White House aides – somber and grim-faced – were televised via news loops that kept repeating every twenty minutes.
As trading began, and steep, even precipitous falls in stock values occurred, automatic computerized trading brakes kicked in as soon as the key indicators fell below the triggering thresholds. This temporarily froze market trading in Asia. However, by that time in the day, the markets in the US had opened, and the same frenzy took hold there as well. The European and South Asian markets then entered the feeding frenzy too.
But the upheavals in the globe’s stock markets were nothing in comparison to what struck the bond markets. As investors were calculating how the US would service the country’s sovereign debt – let alone how new offerings would be issued these same investors fled the bond markets into anything else that seemed more stable by comparison.
The big question was, however: from bonds into what? Recent warnings about the impact of the US debt crisis from the head of the IMF, Christine Lagarde, suddenly became its own self-fulfilling prophecy.
Reassuring words from big investors like Warren Buffett and other large fund managers that everything would be sorted out, if only everybody could just take a deep breath and wait a day or two for the politicians to become adults again, fell on deaf ears.
After a tense week of tumult and turmoil in the markets worldwide, Treasury Secretary, Jacob Lew, announced that an exhaustive evaluation of every single US Government financial obligation – from all those Social Security payments to tens of millions of retired persons to military base expenditures around the world to maturing treasury bonds – allowed them to issue a plan to systematically schedule disbursements in line with tax revenues, even if retirees and everybody else would need to wait an average of two weeks longer than usual for their payments.
But the sight on television screens worldwide of thousands of elderly Americans besieging Capitol Hill, led by a handicapped, decorated Vietnam veteran, demanding their now-overdue Social Security payments – all organized through a massive social media campaign – mesmerized the world.
Embarrassed congressmen began barricading themselves in their offices to avoid those elderly citizens – some in wheelchairs and even a few brave souls carried in on gurneys – who were filling the hallways and corridors of the various congressional office buildings.
In the end, it took the Chinese treasury authorities’ announcement they had no doubt the US Government would honour its obligations in due time, “without doubt, just as they have been doing since 1789”, to restore a semblance of order to the markets globally.
The Chinese, of course, had no intention of seeing their vast holdings in US Treasuries degrade steeply in value as a result of this ongoing, contagious, and increasingly irrational financial pandemonium, and so they waded in to the roiling markets to attempt a rescue. The significant fall in the Dollar vis-à-vis other world currencies as a result of this mess also transfixed the Chinese as they watched the pressure on the Renminbi to revalue upward build up dangerously as well.
The cost was enormous, however. Several major banks in Europe collapsed in the midst of the crisis when sudden, unexpected runs on deposits occurred. Rumours had spread via social media that those banks had invested too deeply in US bonds and were now severely undercapitalized.
Reassurances from the EU and the European Central Bank proved to be of no avail. Even a German intervention proved to be insufficient to save all the threatened banks. Similarly, dozens of other smaller financial institutions found themselves in deep trouble when it became clear the value of the US Treasury bonds they held had already dropped by 10% or more in a single forty-eight hour period – and threatened to fall further if the bleeding was not staunched in the next several days.
Chinese President, Xi Jinping, found the chaos to be an opportune moment to demonstrate his leadership skills – at a price. During a previously scheduled speech at a Beijing conference on the new international architecture of the 21st century, Xi noted that it might well be time for America to begin planning its phase out of its military presence in Okinawa as well as the Korean Peninsula.
“World War II, the Korean conflict and even the Cold War were all history,” he explained. Simultaneously, the Chinese announced plans for a new military exercise to take place in the South China Sea in the next several months, named “Heavenly Peace”.
Military officials explained that the exercises might modestly disrupt shipping, but they would try to do so as little as possible. However, there might be a few exclusion zones several hundred kilometres beyond Taiwan that would be described shortly in more detail.
While the Russians were not heavily invested in US bonds, they nevertheless chose this confusing period to announce new enhanced tariffs on natural gas pipeline distributions to Western Europe.
In the Middle East, meanwhile, the Syrians quietly began to be significantly less cooperative with the chemical weapons inspectors than they had been a few weeks earlier. Some storage sites suddenly became unavailable for visits because of bad weather, sand storms and the unavailability of transport and military escorts.
As always, the Israelis mobilized a portion of their air force for possible duty northwards and the Iranians became noticeably less vocal in their protestations that their nuclear program was for peaceful energy purposes. North Korea’s Kim Jong-un took this moment to insist that the West supply his nation with ski-lifts to allow him to compete for the next winter Olympics up for bidding.
Thoroughly chastened at the ways things were turning out, the Tea Party faction of the Republican Party in Congress finally agreed to allow their leader, Speaker of the House, John Boehner, to sign onto what was quickly dubbed the mini-grand bargain of a measure that provided for a debt ceiling increase, and a continuing resolution for the government’s operations at the levels set out in the sequester measure passed by the previous Congress for the entire financial year. Opposition to Obamacare was simply left off the table in the end.
But the final ignominy came when the rating agencies issued their newest scoring of the US as a credit-worthy nation. The full horror sank in when the US was given a rating at the same level as Greece was gaining. The combined effects of starkly higher bond costs and the market mayhem also knocked 1% from the country’s economic growth for the quarter, although such information was not immediately available (along with the equally grim data on unemployment, inflation and half a dozen other crucial economic indicators) because the compliers of the data and the resulting indices had been on shutdown induced furloughs until 1 November, of course.
Perhaps this sounds rather like the kind of thing Tim Burton might have released as his newest animated feature, just in time for Halloween, if he was also moonlighting as a bond trader. But fortunately, no one, or at least practically no one, thinks Congress – individually and as a body – is quite as foolish as all this.
And if news reports are correct, it seems that just maybe Congressional Republicans have decided to sort out their caucus sufficiently to reach a deal on the debt ceiling (although not the shutdown as well) with the Democrats in Congress – and with the president.
Late on Thursday, 10 October, the New York Times reported, “House Republicans, looking for a way out of a budget standoff they began, are coalescing around a plan that would raise the debt limit through November22, which they will present to President Obama at a meeting at the White House on Thursday afternoon [Washington time]. The White House indicated that while the president might sign a short-term bill to avert default, it rejected the proposal as insufficient to begin negotiations over his health care law or further long-term deficit reductions because the plan does not address the measure passed by the Senate to finance and reopen the government.”
Given the president’s position, however, there is still some distance to travel before this drama has run its course.
The report went on to say, “The president has made clear that he will not pay a ransom for Congress doing its job and paying our bills,” said a White House official, speaking on the condition of anonymity.
Though Mr Obama indicated this week that he would sign a short-term extension in the nation’s borrowing authority, he is still pressing for a Democratic Senate proposal to extend the debt limit for a full year with no “extraneous political strings attached,” the official said. But without an agreement to also end the shutdown, the president will not negotiate on other issues, the official said.”
That same official, speaking in much the same kind of language Obama has used in recent days, added, “Once Republicans in Congress act to remove the threat of default and end this harmful government shutdown, the president will be willing to negotiate on a broader budget agreement to create jobs, grow the economy and put our fiscal house in order, While we are willing to look at any proposal Congress puts forward to end these manufactured crises, we will not allow a faction of the Republicans in the House to hold the economy hostage to its extraneous and extreme political demands. Congress needs to pass a clean debt limit increase and a funding bill to reopen the government.”
While this is not even close to an actual settlement yet, this intricate maneuvering now going on finally seems to be a sign Republicans want to bring this potentially disastrous standoff – over the shutdown and now the debt ceiling – to an end. This is especially true, now that the polls are showing increasingly clearly that they are garnering much more of the blame than the president or Senate Democrats have been receiving from an increasingly angry, bewildered or enraged public.
Meanwhile, on Thursday, Treasury Secretary Jacob Lew pleaded with Congress to raise the debt ceiling, warning the Senate Finance Committee of potentially severe market and economic repercussions if it did not. Lew stressed that the Treasury Department would run out of “extraordinary measures” to free up cash in a matter of days. Past that point, the country’s due bills could overwhelm the cash on hand plus ongoing tax receipts. When that happened, the unthinkable became policy. In his testimony, Lew said, “There is no plan other than raising the debt limit. The legal issues, even regarding interest and principal on the debt, are complicated.”
This one has all the makings of one heckuva cliff-hanger of an adventure flick. No, wait, this one is already over the cliff and we’re no longer in Kansas anymore, as Dorothy once said. Only this time clicking those ruby slippers over and over again, simply is not an option. DM
Photo: U.S. House Speaker John Boehner (R-OH) (C) stands with fellow Republican House leaders as he addresses reporters in Washington, October 10, 2013. U.S. House of Representatives Republicans are still weighing a short-term debt-limit increase, possibly for six weeks, with no decisions going into a closed-door party meeting on Thursday, according to a senior Republican aide. REUTERS/Jonathan Ernst
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