My Comments: Readers of this blog know that from time to time, I express an opinion about politics or economics. I’m still coming to terms with the efforts by folks I consider nuts to shut down the government and risk a default.
Having lived in various places around the world, and been exposed to international investing ideas for over 20 years, I’ve seen changes that have been good for us as a nation and observed some threats. But the recent events have been very different. For the most part, global economics is similar to watching paint dry or grass grow. You know it’s happening, but boring as hell.
What the Tea Party professes to do and what the outcome is likely to be are on opposite sides of the divide. Talk about the Law of Unintended Consequences. My hope is there are still enough rational members of the body politic to rise up and quash the Tea Party. A viable, two party political system in this country is the only way to assure our continued success.
By Laurence Fink (The writer is chairman and chief executive officer of BlackRock, a company with responsibility for $3.8T of client assets)
The US, as we have frequently been reminded in recent days, still belongs to a small club of nations that in modern times have never intentionally defaulted on their debts. But to understand the short and long-term effects of our government’s recent brush with financial Armageddon, it is important to realise that more was at stake than a good payment record.
Confidence in America derives not just from our sustained economic growth over the past century but also from our ability to reconcile the nation’s diverse political views. This is now in jeopardy.
The US has always been a nation that set a standard. Our emergence in the 20th century as the bearer of the world’s reserve currency is based on the faith of global markets in the underpinning of our economic system by democratic principles and ability to overcome our differences.
Based on conversations with leaders in business and government, in the US and beyond, I can tell you this faith was badly shaken during the 16 days of the government shutdown and the high-stakes poker over a debt-limit extension. While we can all breathe easier because the government is still making good on our obligations, it would be wrong to think we avoided doing real and potentially lasting damage to the economy, at home and worldwide.
The weeks of political turmoil have already slowed growth, taking an estimated $24bn out of the economy. This is particularly unfortunate at a time when economic fundamentals have been strengthening and the US recovery picking up steam. The housing market has been gaining momentum, corporate profits have been strong and America has been gearing up for a manufacturing renaissance thanks to lower energy costs delivered by new technologies such as fracking.
But the market environment is still challenging. Uncertainty is high and political wrangling is pushing the fundamentals to the backburner. You cannot overestimate the impact of this on confidence at a time when business leaders should be making decisions that drive growth. It has put the US economy in a holding pattern that, if it persists, could lead to a global slowdown.
Scores of chief executives have told me they have been putting off investment in factories and equipment, and delaying hiring decisions, while they wait to see how events unfold in Washington.
More troubling still, the trepidation has spilled over to the bond market. Many foreign investors are rethinking their approach to investing in US debt. Even a marginal change in the willingness of governments, pension funds, insurance companies and other institutions around the world to buy America’s bonds will incrementally raise interest rates and drive up the costs of financing our deficits. That will not only worsen the fiscal situation at federal, state and local levels; it will also mean higher borrowing costs for anyone buying a house or other big-ticket items.
This in turn will push the US Federal Reserve to again delay the tapering of its bond-buying programme. So rates will stay low in the short term, but further distort financial markets and delay the restoration of sustainable monetary policy. And because the dollar will for now remain the world’s reserve currency there will be greater risk premiums for all borrowers. The repercussions will be felt not only in the US markets and economy but across the globe, especially in the developing world, which already pays an even higher risk premium for borrowing.
Still, I remain an optimist. If our politicians show themselves ready – and able – to take a bipartisan approach that avoids another debt-ceiling showdown and to address our long-term deficit issues, we can minimise the lasting damage to the economy and restore our reputation as a principled nation committed to meeting our obligations.
Above all, the next round of budget discussions needs to show that the US political system still works.
But if we head into 2014 beating war drums in Washington and reviving the narrative of a potential default, overseas buyers of Treasuries are highly likely to move quicker to diversify their holdings, with all the global consequences that entails. All members of Congress – conservative and progressive alike – must remember that the US is a debtor nation, dependent on international investors who own more than $5tn – or about 50 per cent – of publicly held federal bonds. That is why the budget battles have global ramifications.
The short-term damage has been done; the next round of budget discussions needs to show that the American political system still works. If our leaders can return to the standards of good faith, civil deliberation and mutual respect that have always provided the foundation of our global economic leadership, we can restore the confidence of all Americans – as well as business leaders, investors and markets worldwide – and with that the potential for a long-term US economic resurgence.