We will see this week whether or not the game of political Russian roulette being played out in the the US will lead to US debt default. It is difficult for someone at a distance to properly understand just what it is happening. If this New York Time story is any guide, it may be equally difficult in Washington. This Economist story on reactions in Peoria is, I suspect, probably not a bad guide to US local reactions outside Washington.
Meantime, major glitches have emerged in the roll-out of the the new insurance exchanges that form a key element of Obamacare. That's not surprising. The technical challenges were obviously considerable. Think NBN for an Australian example.
We now seem to have two choices. Later this week, the US will start defaulting as it seeks to meet daily bills only from the cash collected that day. There has been discussion about the extent to which the US Administration has power to prioritise, to focus on meeting its financial obligations while stopping other Government spend. I imagine that, regardless of the formal position, the US will try to avoid or minimise default on financial obligations.
The second choice is some form of compromise that will at least defer debt default. However, that is unlikely to provide a solution, if indeed a solution is possible.
I am trying to finish a major piece for Australian Business Solutions Magazine on the outlook for 2014. I suspect that you will see my problem. I am reasonably knowledgeable, but I struggle to break free from the shackles set by immediate issues.
I suppose that my immediate personal view is that a short term US default might not be such a bad long term thing, but then the global financial system is now sufficiently vulnerable that no-one can be sure. So to help my thinking, what do you think that the real outlook is for 2014? What would be the implications of a US default?
Don't feel that you need to limit responses just to these questions. I am looking for inspiration!
The ripples from a prospective default spread. According to reports in the financial press, a number of the larger US money market funds have sold off their holdings of US Treasuries maturing in late October or early November, boosting their cash holdings and pushing short term interest rates higher. Short term funding issues are starting to emerge for US banks as well.
Writing in the Australian Financial Review, Karen Maley says that the impasse is now placing pressure on the $US5 trillion per day repurchase or repo market. In this market, banks or other borrowers use Treasury Bills as security for short term borrowing purposes. Say you need overnight cash, rather than trying to sell securities, you pledge them for cash from the money market funds. If you cannot pledge those Bills, you have a problem.
I imagine the the Federal Reserve could actually do something about that by pledging to buy Bills at face value or even at a premium to cover any missed interest payments. That would also provide protection for non-US holders.
Still, it is uncharted waters.