On Friday, September 29 it is the deadline to raise the federal budget deficit before a crisis starts on October 1. Trump threatens to not to cooperate unless a border wall is built. To get the budget done Congress would have to authorize paying $30 billion to $60 billion for the wall. But this is a capital expenditure, so the amortized cost might be 3% of the capital cost a year. That’s only $3 to $6 per person a year, plus interest.
Trump may find that the senators who can protect him from impeachment are a valuable resource of contacts to build alliances with, rather than to antagonize, so there will be room for compromise.
The idea that U.S. debt should be downgraded is ludicrous because government have taxing power, unlike corporations who have to recruit consumers to buy goods. Very importantly, the U.S. is a “print and pay” country that prints the same currency used to pay its debts. It can ask the Federal Reserve in emergencies to simply print up money to make the minimum payment on its lovely interest-only debt payments.
The paradox is that the worse things get the more people will engage in a bidding war to buy a ticket on a lifeboat getting off of the Titanic, meaning that Treasury bond prices can go up to even higher prices despite an increase in bad news. This is called “crowding in” where investors crowd in to financial lifeboats of Treasuries and abandon junk bonds.
It is very unlikely that a default will occur or that inflation will return. The dominant paradigm of the past 30 years has been globalization and the export of good jobs to poor countries, driving down global wages, thus suppressing inflation in Developed countries. This is creating a global version of the 19th century disinflationary economy that the U.S. experienced. In that era, up until the 1930’s New Deal, labor was weak, crashes were frequent, inflation and interest rates were low. Now those type of disinflationary forces are hard at work in Emerging Market countries trying to outcompete and out-export goods and services to Developed countries. The difference between the 19th century near deflation and now is that EM countries (and even the U.S.) have state sponsored banks recklessly lending money in EM countries so as to encourage more job creating export industries in EM countries. It is now the 19th century disinflationary era on steroids. How can inflation of the 1965-81 era in the U.S. return when that was based on labor market conditions where wages were propped up by unions, import restrictions and lack of imports, and lack of foreign competition suppressed disinflationary pressures. Currently Developed countries believe that it is crucial to allow globalization and pro-business activities so as to help grow the economy. It seems unlikely that there will be a return to the New Deal pro-labor, anti-import era of 1930-80, nor is it unlikely that EM countries will stop their policies of force feeding loans to subsidize unprofitable companies that export goods so that their workers can have a job. We are trapped in a world of Savings Gluts, flight capital, and state sponsored money-losing export businesses that have overcapacity.
In recent years the global economy has been propped up by China’s absurdly high appetite for construction supplies, where in two years they used as much cement as the U.S. did in a century. Surely when that ends then there will be less demand for those goods and waves of disinflation will spread from failed makers of those supplies. Same for flight capital’s purchase of real estate in Developed countries at ridiculous prices.
The idea of inflation returning and ruining bonds is utterly wrong. Domestic investment grade bonds are properly priced in reflection of this repeat of the 19th century era of disinflation and lack of worker’s power.
Investors need independent financial advice about the risks of inflation returning.