Tuesday, October 15, 2013

This is why world government would be a disaster

So the US is inching ever closer towards a credit default and the resulting convulsions of the world economy.  Even if a deal could be reached at this point, which is by no means assured or even likely, it is highly probable that individuals could delay the implementation of such a deal beyond the Oct 17th deadline.  Clearly there will be massive stock market disruptions and a lot of people, particularly those invested in 'extremely safe' US treasury bonds, will have their portfolios smashed.  My feeling is that as soon as that happens people will scream loud enough that any economic fundamentalists who are busy delaying the implementation of a deal will stop and things will return to normal.  You know, the new normal, where the US is set to default again in a few months and the parties get set for another round of being obstructionist, grandstanding jackasses.

Here is what I am wondering about though:  Will the value of treasury bonds actually decrease in the event of a short term default?  The last time this sort of thing happened and the US got its credit rating lowered treasury bonds actually went up because everybody panicked and ran to the safest thing they could think of, ignoring the fact that the panic was caused by the safe thing being deemed not so safe.  It is truly hilarious when you think how that played out.

Credit Agency:  "The US might not repay its bonds."

The World:  "This worries us. Buy US bonds en masse!"

An actual default though seems like it might get the world past the tipping point of confidence.  I wouldn't be shocked if the borrowing costs of the US rise dramatically after even a short and relatively small failure to repay.  The real question is what the investors of the world will view as the new guaranteed investment if/when the US is no longer considered a sure thing.  There simply isn't another country in a position to offer that sort of confidence and everything else is a gamble.  When even a US treasury bond isn't secure it will be hard to imagine what an investment advisor will recommend as a safe and guaranteed option to round out a portfolio will be.

I am going to make a set of predictions on what will happen in the next little while - let's see how close it comes to reality.

1.  There will be a failure to pass the necessary bills in time to avoid a default due to filibustering by a few random hardliners.

2.  Stock markets will see a precipitous crash as the US is forced to default.

3.  The crash will cause people everywhere to scream at politicians and they will very rapidly pass bills to fix the debt ceiling and get the government back to work.  The final bill that does pass will reduce spending some but will not significantly touch Obamacare.

4.  The borrowing costs of the US will rise and investor confidence in the US treasury bond will noticeably plummet.

5.  There will be a longterm drop in world stocks with confidence taking several years at least to come back.

Not armageddon certainly but not a party either.

And this is what brings me to the title of the post.  When just a couple of people have the ability to totally bork the world they will eventually take the opportunity to do so.  All people are interconnected and all governing entities will periodically do idiotic things so the safest thing is for there to be many smaller governing bodies so the stupid things will be spread out over time.  This way we will be always living with a small number of failures but generally we will chug on just fine.  The US government itself has become too big to fail and there is nobody around who can bail it out; just imagine how bad it would be if we had a world government that got to that point.

No comments:

Post a Comment