Tuesday, September 24, 2013

Is this the US Congress that cried Wolf once too often?

See the Yahoo Breakout video here.

There is a sense of déjà vu abroad this week in the realisation that the US Congress seems to be, once again, heading for the so-called fiscal cliff, where agreement cannot be reached between Democrats and Republicans about spending for the forthcoming year.

This all happened before, in 2011. Phrases like “sequestration” - the automatic block on issuing funds to government departments that is legally invoked whenever the budget goes above a certain limit, “Fiscal Cliff”, already mentioned, when the USA is unable to pay its bills because of disagreement in Congress on the budget and “debt ceiling”, which means that the government is legally banned from increasing the amount it has borrowed in order to run the country, were bandied about.

From the perspective of those outside of the USA, the situation in 2011 had something of the nature of an anti-climax, eventually. Things were sorted out, but at what the news media would have characterised as the eleventh hour.

What has brought the situation onto into the front line on this occasion is the fact that is was referenced by Mr. Bernanke during his post-FOMC meeting press conference last week. He said, and I quote:

“A government shutdown and perhaps even more so, a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy”.

The last time this happened, in 2011, Standard and Poors downgraded US debt. The effect of this was, perversely, to drive money into US treasuries, as they are still regarded as a safe haven. When people buy US bonds, their yield falls, and so too does the value of the US dollar against other currencies. Think of bond yields as a proxy for official interest rates. Low interest rates in any jurisdiction tend to result in a fall in its currency.

The US Congress must agree on a budget by the end of this month, which is this coming Monday. Will it be a repeat of 2011, or might it even be worse on this occasion?

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