Raghuram Rajan’s Sneaking Out the Door (Raises Interest Rates)

The economist who predicted the financial crisis just sounded another alarm—it would be wise to listen this time

A good article (thanks Tom) about a good man trying to get out ahead of a rising interest rate world; India’s head of the RBI, who is raising interest rates while the US Fed keeps things stable for the rest of the world to start deleveraging.  Is this really what is in play, a world setting up to clean up its debts and inflationary excesses?

“Individual investors should see ahead of the curve, noticing that a world of higher interest rates looms. People now holding the kind of assets that would experience a sharp fall if interest rates go up should get out of them, particularly if these investments are burdened with fixed obligations that will not be reduced as interest rates go up. Of course, this is the kind of advice that cannot be useful for everybody at the same time. Aggregate losses cannot be avoided. Someone will have to absorb them because, as interest rates go up, the prices of the assets will go down. If you sell your assets before prices fall, for example, it is the buyer who will have to take the loss. This is the price that society has to pay for having unsustainably low interest rates for a long time.”

[Needless to say, my trade in Treasury bonds is just that, a trade.]

Is the most influential reserve bank in the world continuing its inflation to among other things allow less powerful entities to get out the door first?  I don’t know, but it seems possible given that the Fed has the backing of an outwardly stable economy to at least have made a pretense toward good stewardship.  A lot of people are dumbfounded about Fed policy and though I write about clown cars for fun, they are not stupid.  Is there a big plan toward global deleveraging?

I would say maybe, but then I received this from Treasury (I get email updates from them), laying out a case to continue expanding the debt; i.e. continue feeding the habit.  It sounds like the same old Kabuki Dance.  Maybe more nimble, less hubris addled parts of the world are sneaking out the door first as a bloated global leader blindly goes about business as usual.

Business Leaders, Economists Underscore Consequences of Default

​In August, Secretary Lew informed Congress that the United States would likely exhaust its borrowing authority in mid-October absent action by Congress to raise the nation’s debt limit. In recent weeks, business leaders, economists, and other members of the financial community have spoken out about the dangers of delaying a debt limit increase or risking – for the first time in the nation’s history – a default.

As these economists and business leaders know well, raising the nation’s debt limit does not authorize new spending or increase the deficit. Not raising the debt limit, however, could lead to “severe economic consequences,” in the words of one well-respected business leader. Indeed, failing to raise the debt limit would put at risk important funding that millions of Americans rely on like benefits for seniors and veterans, paychecks for active duty military, food assistance for children in need, and payments to Medicare providers.

While no one knows for sure the full costs of default, economists and business leaders have made one thing clear: the consequences would be serious and wide-reaching:

· Judd Gregg, CEO of the Securities Industry and Financial Markets Association (SIFMA): “Defaulting on the nation’s obligations, which is the alternative to not increasing the debt ceiling, is not an option either substantively or politically. A default would lead to some level of chaos in the debt markets, which would lead to a significant contraction in economic activity, which would lead to job losses, which would lead to higher spending by the federal government and lower tax revenues, which would lead to more debt. It understates things to say merely this is not a smart position to put forward. It is a terrible policy that would produce immense economic disruption and very difficult times for people on Main Street.” The Hill

· Mark Zandi, Chief Economist at Moody’s Analytics: “If you don’t raise the debt limit in time, you will be opening an economic Pandora’s Box. It will be devastating to the economy…Consumer confidence will sharply decline, investor confidence, business confidence. Businesses will stop hiring, consumers will stop spending, the stock market will fall significantly in value, borrowing costs for businesses and households will rise.” USA Today

· Chris Krueger, Analyst for Guggenheim Securities LLC: “As serious as a government shutdown would be, it is nothing compared to what could happen if Washington fails to raise the debt ceiling.” Bloomberg

· Bill Hampel, Chief Economist, Credit Union National Association: Failing to honor our obligations means “we basically would default on our debt, interest rates would go through the roof, and we’d fall into another recession, kind of like the one we went through in 2007 and 2008.” News 22 FM

· Martin Regalia, Chief Economist, U.S. Chamber of Commerce: “[There] is only one option and that is to do whatever is necessary to keep the U.S. government from defaulting.” The Hill

· Omar Sharif, U.S. Economist, RBS Securities: “The last time the Treasury was in this position, in 2011, the negotiations ‘put the brakes on for a lot of businesses as far as hiring and capital spending decisions they were making at the time.’” Bloomberg

· Alec Phillips, U.S. Political Economist, Goldman Sachs: “Even a short delay in increasing the debt ceiling could have important negative consequences for consumer, business and financial market confidence, and would probably put pressure on stocks and other risk assets.” Powers Capital

· Rob Nichols, President and CEO, Financial Services Forum: “There’d be a host of severe economic consequences associated with debt default. We’d have negative impact for growth, job creation, interest rates would spike, it would make our deficit problems even harder to tackle. Raising the debt ceiling is a critical and urgent task.” Politico

· Dean Maki, Chief U.S. Economist, Barclays: “The consequences of not raising the debt ceiling would be quite large.” CNBC Squawk on the Street, August 12, 2013

Never in history has the nation defaulted on its obligations. Presidents and Congresses of both parties have recognized the importance of protecting the full faith and credit of the United States government. As Secretary Lew said in a speech to The Economic Club last week, “Congress can get this done. The time to do it is now.”

Anthony Coley is Deputy Assistant Secretary for Public Affairs at the U.S. Department of the Treasury