Will US Dollar Collapse Over Another Debt Ceiling Fight?
Brinksmanship Could Start a US Dollar Collapse
Yet again, the United States stands on the edge of an economic collapse and the reasons are disturbingly familiar. The federal government is about to hit the debt ceiling, which stands above $18.0 trillion, and Congressional Republicans refuse to raise it. If the U.S. misses another debt payment, could it lead to a U.S. dollar collapse in 2016?
GOP lawmakers have weaponized the debt ceiling. It has become a routine way of gaining leverage in budget negotiations with President Obama. The Republican strategy is simple: don’t blink first. (Source: “Why a Deal on Debt Limit Doesn’t Bode Well for Shutdown Threat,” Wall Street Journal, October 14, 2015.)
But Treasury Secretary Jack Lew says the government runs out of cash on November 3, giving us a fairly good reason to start panicking.
Whether or not you agree with the Republicans positions on policy is irrelevant. It doesn’t matter who is a deficit hawk and who isn’t when we’re facing an immediate threat. The last debt ceiling fight led to a downgrading of U.S. debt.
Another blow to the credibility of the U.S. government could be devastating. China has already started unloading some of its U.S. dollars to secure the value of the yuan. Could a U.S. dollar collapse be around the corner?
Let’s not forget that China is America’s largest debtor. If others follow suit, especially in light of a second downgrade, the U.S. could face significantly higher borrowing costs.
If the interest payments on America’s debt become more costly, the country would need to borrow more just to avoid a default. Nobody who’s sane wants that situation, but politicians can be notoriously short-sighted. They just want to score political points.
Downgrade Would Break US Dollar Outlook
The understanding in Washington is worlds apart from the consensus on Wall Street. In the nation’s capital, tackling America’s debt is a hot button issue. Republicans just want to cut, and Obama refuses to negotiate with a gun to his head.
Wall Street, for all its faults, recognizes a simpler truth: the United States cannot afford to NOT raise the debt ceiling. We live under the illusion that the United States is naturally endowed with low borrowing costs. Our bubble may soon be shattered.
The United States earned the creditworthiness of capital markets through decades of growth and stellar economic performance. Stability is what secured the US dollar and stability is what’s currently under threat.
Don’t just take my word. Standard Poor’s, one of the three big rating agencies, didn’t mince words when they downgraded US debt.
“[Our] conclusion was pretty much motivated by all of the debate about the raising of the debt ceiling,” said John Chambers, chairman of SP’s sovereign ratings committee. “It involved a level of brinksmanship greater than what we had expected earlier in the year.”
Unless we see Congress get their act together, there is a serious threat of another downgrade to U.S. debt. Another shock to the creditworthiness of the United States could decimate the near-term U.S. dollar forecast.
US Dollar Hinges on Race for House Leadership
It’s the worst possible moment for a debt ceiling fight. The leader of House Republicans, Speaker John Boehner, announced his retirement earlier this month, creating a power vacuum in the Republican caucus.
His presumed successor was a trusted lieutenant named Kevin McCarthy. When Kevin Spacey was preparing for his role on House of Cards, he shadowed McCarthy for a week to learn the inside baseball of Washington.
Needless to say, McCarthy is a political shark behind closed doors. But he dropped the ball as soon as he stepped in front of the camera. After making some indelicate statements about Hillary Clinton’s Benghazi hearing, he bowed out of the race.
Who will be House Speaker? Surprisingly, very few people are lining up for the job. I suspect most potential candidates know that one of the first things they’ll have to deal with is a debt ceiling fight.
No one wants the U.S. dollar to collapse under their watch. No one wants to see the stock market crash and the economy collapse because of the reckless actions of their own party. Right now, being House Speaker is the worst job on Capitol Hill.
Courtesy: Gaurav S. Iyer
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