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With the looming threat of a government shutdown in the U.S., global oil prices are down and trading in Asian markets has slowed. As the financial consequences at home become clearer, we consider the possible economic effects of a shutdown on global markets.
- Robin Harding US economics editor, Financial Times
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Later in the broadcast, an application that records everything you do is at the center of Dara Horn's latest novel, "A Guide For the Perplexed." But first, for the first time in 17 years, the US government is on the brink of a shutdown, unless something, something big changes in the next 11 hours or so. Many federal offices and services will shutter tomorrow.
MR. KOJO NNAMDIWe have some idea of how this threat is playing at home, but combined with the debate over the debt ceiling likely to happen in just a couple of weeks, what about global financial markets? How are they responding to this? Here to give us a sense of how they are reacting, thus far, and what may come if the US does hang out a closed sign tomorrow, is Robin Harding. He is the Financial Times US Economics Editor. He joins us in studio. Robin Harding, thank you for joining us.
MR. ROBIN HARDINGThank you for having me, Kojo.
NNAMDIYou, too, can join the conversation. Give us a call at 800-433-8850 or you can send email to firstname.lastname@example.org. Robin, here in Washington, we have sense that shutdown could deliver a big blow to this region. The Post reporting late last week that Jon Boehner's constituents in Ohio seem unfazed by the threat. Are international financial capitals paying much attention to the possibility at this point?
HARDINGWell, I'd say that international markets are only just waking up to the fact that this is possible, so people in London or Australia or Munich, or Asia, or anywhere else -- it's not a political issue to them, so they haven't heard any of the stuff that Americans have been hearing constantly for month after month after month. Suddenly, they're waking up, they're going into the office, and they're seeing these news stories. It's now leading the business news, I would say, in most countries that maybe the US Government is going to shut down.
HARDINGAnd, I think they're now asking the question, well, what exactly does that mean? So, so far, I would say they're more perplexed than anxious.
NNAMDIGiven all the turmoil we've seen on the international level in recent years, how would you assess the US's current financial standing and its influence on other global markets. There's no doubt that the US remains the absolute center and foundation stone of global financial markets. Everything rests, essentially, on the dollar, and the commitments of the US Treasury to pay its bills, and all the rest of the global financial markets, this elaborate structure, is built off that base.
HARDINGAnd, so, anything which effects the dollar, the US debt, will have -- send shockwaves around the world, and we saw exactly that phenomenon happen in 2007 where the shocks started in the US, but the effects, the depth of the recession was actually worse in other countries.
NNAMDIIf you'd like to join the conversation, again, the number is 800-433-8850. Our guest is Robin Harding. He is the Financial Times US Economics Editor. You can also send us email to email@example.com. With markets around the world in various stages of recovery, what effects might we anticipate or are we already starting to see if one, this government shutdown goes forward? And two, if on October 17th, the Congress fails to raise the debt ceiling.
HARDINGSo, what we're seeing so far is a little bit of nervousness in markets, but not much. And I'd actually expect that to continue for some days, so even if the shutdown happens, I don't think we'll see any big shock in financial markets in the US or abroad. And that may continue for some days, which is actually dangerous, because the way financial markets tend to work is that suddenly a switch will flick and all hell will break loose.
HARDINGBut, you won't get any warning that it's about to happen. The most likely trigger for that would be if there starts to be serious concern that we're going to not raise the debt limit, and the US is going to default on its debt. If markets actually come to believe that is going to happen, then, suddenly, it will just be like that switch flicking, and you'll see stock markets plunging around the world.
NNAMDIWhich puts all of those markets and all of those people in all of those other countries, who are now just beginning to wake up to this debate, I guess, on the alert for another possibility, and that is if the government does not shut down, the speculation is that House Republicans are gonna take the fight over the Affordable Care Act into the discussion about the debt ceiling. Then, I guess people will pay a lot more attention to the politics.
HARDINGI think that's exactly right. And so, in some ways, from the financial market point of view, the government shutdown is actually being seen as good news, because it may reduce the chances of a crisis over the debt ceiling, which is much, much more dangerous and frightening to financial markets.
NNAMDI800-433-8850. Do you worry the shutdown will hurt the US reputation abroad, and if so, why? Do you think the global economy will suffer as a result of the shutdown? Give us a call. 800-433-8850. You can send email to firstname.lastname@example.org or you can send us a tweet at kojoshow. Polls show that the American peoples' opinion of Congress is less than stellar. One, on the international stage, is one of the biggest effects, perhaps, likely to be a blow to the US reputation?
HARDINGSo, I think the thing to remember is people around the world look to the US as being the country which leads the world, both politically and economically. And they have huge admiration for the US. And there's always more focus around the world on what's going on in the US than there is focus in the US on what's going on around the world. So, at the same time, I'd say, there's always a little bit of interest in the foibles of the US political system, so, you know, a little bit of turmoil in the US -- people will enjoy the spectacle, but they'll be expecting it to be resolved in the end. And as long as it is, I don't think there will be much of a knock to the US reputation around the world.
HARDINGIf it were not to be resolved, and an entirely manufactured US political crisis were to do damage to the world economy via a default on the US debt, then I think that would do huge damage to the US reputation abroad. And it would do permanent economic harm to the country, because I think people would become less willing to hold the dollar and use the dollar as the main currency, in which international trade is conducted, for example. So, I think, as long as we continue and we raise the debt ceiling, there will be no lasting impact.
HARDINGIf there were to be a debt ceiling crisis, a real one, then you're talking about a really devastating blow to the standing of the US and the US economy.
NNAMDII've heard President Obama use the word 'banana republic,' as in, we are not a, the other day, recently, and, as you pointed out, even though there are -- there is a great deal of criticism in capitals around the world about the US politics and the US economy, as both a standard for capitalism and as a standard for democracy, the US still tends to be viewed around the world as the standard in both of these cases.
NNAMDIBut it would appear that if the US phases to raise the debt ceiling, that, as you point out, not only is there likely to be permanent damage, but there can also be a permanent skewing of the view about the United States as the world leader in these categories.
HARDINGI think that's right, and people admire the US because it works. And it resolves its problems. And, no matter the great social and political and economic debates we see play out in the US, the US political system has always found a way to resolve them. And as long as that's the case, then I don't see that admiration being dented. If the US political system and the US Constitution and the arrangements that have endured so well for so long suddenly show themselves unable to resolve the country's problems, then I think you will start to see people not wanting to look to the US for a model.
HARDINGBecause why would you look for a model to a country which can't even pass a budget for itself and will default on its own debt when it's perfectly capable of paying it?
NNAMDIRobin Harding is the Financial Times US Economics Editor. Perhaps more than the threat of a shutdown, Robin, international markets have been keeping an eye on the moves of the Federal Reserve. How did the relatively surprising news out of the Fed, earlier this month, play in global markets?
HARDINGSo, global markets love that. Global markets really like it when the Fed does lots of quantitative easing and keeps its interest rates low for years and years and years, because then they can party, party, party, and they will buy anything with a high yield, a high interest rate. And you tend to find things with high interest rates in a emerging markets, so one of the big phenomenon we've seen in the last few years is US rates have been incredibly low. So investors have gone searching around the world to find attractive investment opportunities.
HARDINGAnd that has fueled the economies of the emerging market countries in Latin America, Asia and even Africa has had a big boom in the last few years. And when it looked like the Federal Reserve was about to go the other way, all that money started flying out of these countries and back to the US and the core countries in the global economic system. So, when, two weeks ago, the Federal Reserve, you know, appeared to change its mind a little better.
HARDINGAt least they got cold feet on doing what they were planning to do. We saw a big surge in emerging markets, economies and stock markets. It hasn't really been very durable, though, because I think people still fundamentally believe that the Fed will soon be starting to slow down its exceptional stimulus. And so this dynamic of the last few years is probably going to continue reversing itself over time.
NNAMDIYes, there was some surprise that the Fed decided the economy needed a little more goosing, if you will. Market watchers, the world over, may want to take a look at London, as well. What is Prime Minister David Cameron proposing for the housing market there?
HARDINGWell, so, if you ever think that Congressional gridlock is bad for the US, then I would look to the UK to see what kind of truly awful economic policy you can get if you put one party in power and let them do whatever they want. Because the UK's government has come up with a really quite bonkers scheme for the housing market, which is quite reminiscent of what happened in the US in the housing bubble.
HARDINGWhat they're going to do is they're going to subsidize handing out mortgages at 95% loan's value, where you don't have to pay the government back for five years, and then you have to start paying them back. And housing prices in the UK are already incredibly high, so a lot of economists, and I think they're absolutely right to worry about this, are worried about the possibility of a housing bubble in the UK in the next few years.
NNAMDII wanted to say what should we be watching as the next few days unfold? But given the fact that you've said that there's not likely to be any gradualism in these markets, that something, if it happens, is likely to happen quite suddenly. Nevertheless, what should we be watching over the next few days?
HARDINGWell, so financial markets, I think, will react. What you'll see happen is they'll start to react in detail to what the news coming out of Washington. So far, it's just been background noise for them. And it's been a factor which people in the markets have discussed, but they're not actively trading on this news. And I think what you'll see happen over the next few weeks is it will come to forefront, and when you see stories about the possibility of a deal to end the budget shutdown or raise the debt ceiling, you'll see markets start to go up or go down.
HARDINGAnd those moves may not be very pronounced to start with, but what they will show is that markets are paying more and more attention to this. And then, the way I tend to think, these things tend to have a shape. So, the kind of shock you might see happen is, if it looks like things are drawing to a conclusion and there's about to be deal, and then that suddenly falls apart, then that's when you will see sharp movements in markets.
NNAMDIWhat's the worst case scenario in the event of both a government shutdown and a failure to raise the debt ceiling for the world economy?
HARDINGSo, I hate to sound too alarmist, but the worst case scenario is pretty awful. If the debt ceiling wasn't raised, then there's a significant prospect that the US would default on payments of US Treasury Securities. US Treasury Securities are the foundation stone of global financial markets. Every other asset in the world, whether it's a German Government Bond or a Japanese stock -- any financial assets around the world is priced relative to the price of US Treasuries.
HARDINGSo, if you default on US Treasuries and this fundamentally safe, the safest asset in the world, is no longer safe, then it throws into question, pretty much, every asset in global financial markets.
HARDINGSo you will see -- it's very hard to predict exactly what would happen but I would think there's a significant chance, not a certainty, of real sharp movements, panic setting of financial assets. And as we saw in 2007, that kind of thing that starts in financial markets very quickly turns into a shock in the real economy. And I think you'd have to put a high chance on there being a recession in the U.S. and a recession around the world.
NNAMDIRobin Harding. He is the financial times U.S. Economics editor. Thank you so much for joining us in studio.
HARDINGThank you, Kojo.
NNAMDIGoing to take a short break. When we come back, think about this, an application that records everything you do. Well, that's what's at the center of Dara Horn's latest novel. It's called "A Guide for the Perplexed." Dara Horn joins us in studio. I'm Kojo Nnamdi.
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