How Washington Looks From A Global Financial Perspective
ARUN RATH, HOST:
So as David just reported, there are now only five days left for Congress and the president to reach an agreement on the debt ceiling.
Zanny Minton Beddoes, the economics editor for The Economist. If we reach October 17th with no agreement, she says the consequences are potentially devastating.
ZANNY MINTON BEDDOES: At some point after that, the Treasury's going to be unable to pay all of its bills. It's going to be essentially driven to a cash budget, only able to pay out what comes in in tax revenue. And quite what that means depends on whether you think the Treasury can prioritize payments. So, for example, can it pay bondholders before it pays others? Or, as many say, the systems are set up in a way that it can't actually do that.
If it were unable to pay bondholders, the U.S. would be in default on its debt. And so the world's ostensibly safest financial asset, the U.S. Treasury bond, would suddenly be no longer so safe. And that could have very, very dramatic consequences. Financial markets could seize up. We could see a financial crisis already extraordinary proportions globally. As we are coming closer to that deadline, you're seeing financial markets get more and more uncertain about what's going to happen.
And actually, I'm quite surprised at how little financial market reaction has been thus far. And I think it's basically because most people think the consequences would be so calamitous, these guys will come to their senses in time, and the worst will not occur.
RATH: There was news late this week that JPMorgan Chase and Fidelity Investments, they'd sold off some of their shares of U.S. government debt to protect themselves. What's your take on that?
BEDDOES: Given what we've just been talking about, it seems an entirely rational thing to do. They're not the only ones. I mean, if you look around the world, policymakers around the world are looking with a mixture of sort of bemusement and growing concern of what's going on in the U.S. The Chinese government has publicly started sounding concern. It's one - obviously, it's one of the largest holders of U.S. treasuries.
And I actually think, you know, even if as we all think is most likely, there is a compromise, and the worst has not happened. Even if that's the case, there has been quite a lot of damage from this process to U.S. standing internationally. And, you know, the U.S. is the world's reserve currency. The U.S. Treasury bond is deemed the safest asset in the world. It can't be healthy for the perception of U.S. policymaking to have the rest of the world see this happening.
And it's actually an irony that just the end of this week, the world's finance ministers and central bankers are converging on Washington, D.C., because it happens to be the annual meetings of the International Monetary Fund and World Bank. So you have pretty much every central banker and finance minister of the world in Washington, D.C. And they are all kind of scratching their heads saying, what on earth is this country doing?
RATH: So we've been through this now several times where Congress waits till the last minute. We have a solution, but it's a short-term fix, and then we're back again in the same position. What's the cost of that kind of cycle?
BEDDOES: Well, I think there's two costs that people don't focus on enough. The first is the cost around the uncertainty. But secondly, even if a compromise is made, it is, as you say, likely to be a short-term compromise. And that means that we're going to go on in this cycle. And U.S. budget-making has become a sort of cycle of brinkmanship where every few months, we have this kind of hostage-taking and sort of high-profile brinkmanship. And then at the very last minute, it's solved and we go on.
The result is actually not just uncertainty but, really, quite poor fiscal policy. The U.S. has a very big medium to long-term budget challenge that comes from the aging of the baby boomers, it comes from the rise in Medicare costs, it comes from Social Security, which over the long term is not sustainable in its present form. And in my view, it comes from the tax code, which is in need of reform. So there's a huge amount that needs to be done to sort out and improve the U.S.' medium to long-term finances.
What the U.S. doesn't have is a short-term deficit problem of the sort that, you know, the European countries had, Greece had. And instead, what's been happening in U.S. fiscal policy is that there have been big cuts in the short term. The sequester, if you remember, was the result of one of these bouts of brinkmanship. The sequester is like taking a kind of meat cleaver to budget policy. It does nothing to deal with the medium to long-term problems. But actually I think on net does harm in the short term.
So paradoxically, the result of all of this brinkmanship, this kind of ongoing crisis from one crisis to another is that you have fiscal policy, which has been too tight in the short term and hasn't actually dealt with the long-term problem. The result is an economy that's weaker now than it need be and no dealing with the problems down the road.
RATH: That's Zanny Minton Beddoes. She's the economics editor for The Economist. Zanny, thank you so much.
BEDDOES: My pleasure.