Hubris

The Howling Whimper

July 18, 2011 /

Dolors & Sense

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—7/18/11—How will the world end: fire or ice?

If we’re talking about the universe, it’s ice, provided “dark energy” continues to power an accelerating expansion of space.

If we’re talking about the Earth, the bet is on fire, as the sun becomes a red giant and exfoliates.

But if we’re talking about the financial world, T.S. Eliot had it right: it may be a whimper.

Well, not quite right.

The end of the financial world is the failure of the US to extend the debt ceiling, leading to a default on Treasuries in August.

Clearly that’s no whimper.

But maybe it is, suggest some.

The Financial Times raises the possibility that the world will shrug off an event, the contemplation of which causes most to cower.

It argues that investors know that the US is good for the money and that what they face is at best a brief delay in receipt. It further suggests that the Chinese, who own a good chunk of those Treasuries, will have to continue buying the defaulted securities because to do otherwise would force them to accept an unwanted appreciation of their currency.

(The Chinese stabilize the renminbi by recycling the proceeds of their exports to the US into dollar securities. If they didn’t, their currency would rise in value vis-à-vis the dollar. Chinese exports to the American market would get pricier, and Chinese workers in export industries would lose their jobs.)

So, not to worry. There will be no panic selling. No resultant rise in US interest rates. The biggest event in financial history will prove a non-event.

One should live so long, as the Yiddishism mockingly asserts.

But even if one does, and especially if one does, the event would not entail the happy consequences that are envisioned.

If the US defaults on its debt—even for a short period—and nothing happens, something very big will have happened. The most trusted financial contract in the world will have been broken, apparently without adverse consequences.

Will this not encourage other economic actors seek to emulate the US government, if they can possibly get away with it?

Will not the ensuing changes in financial behavior eventually weaken the US economy by encouraging debtors of all kinds (not merely mortgagors) to scorn their creditors?

Doesn’t this potential behavior pose a real threat to the entire payments mechanism?

The obvious answer to these questions is: quite possibly.

There is no such thing as a painless sovereign default, especially this sovereign.

US government default without incident could easily become the whimper that howls.

Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)