The media are only just starting to cover the story of Congressional action to pass a government funding bill. Funding for federal agencies ends Friday. The last bill was passed in December, lasting 90 days. That follows a string of short term bills over the past few years. Failure to pass any of them would have shut down the government.
Americans, or at least the media, seem to have grown inured to these regular cliffhangers. Most coverage speculates whether the majority party can avoid defections, and thus whether the nation can avoid a government shutdown. We’ve had a few over recent decades, and it seems they are manageable.
But we are playing with fire, and the game is even more hazardous today.
The deep danger, far greater than any shutdown, lies in the possibility for the dollar to lose its status as global reserve currency. The U.S. dollar remains the currency of choice for international trade, specifically including its predominant role in pricing oil transactions. It is also the currency in which most nations hold their international reserves. Above all, its status as the “risk free” currency – and US Treasury notes as “risk free” investments – allows America to borrow well beyond the amount of our annual GDP, with interest rates remaining largely under the control of our own Federal Reserve.
There are no candidates to replace the dollar in this status, but “loss” of reserve currency status does not mean that tomorrow everyone uses Chinese Yuan instead of dollars, nor that “loss” must happen suddenly. If the value of the dollar starts to respond more to others’ usage and acceptance, and if our debt levels remain so high, our interest rates and our capacity to manage our economy could be constrained by international markets, in a way that they have not been in generations. We have indulged our appetites for decades, thanks to what economist Barry Eichengreen calls the “exorbitant privilege” of the dollar’s role as global reserve currency.
So far, the lack of a replacement currency, plus the increasingly “routine” Congressional negotiations, have allowed us to avoid major repercussions. Today, however, the normal confidence in the US currency faces a vary new environment. Say what you will about the Trump administration’s goals, any institutional changes as sweeping as they portend come with disruptions. The potential disruptions are playing out in stock market selloffs, over unpredictable tariffs, in projections of domestic recession, and disruption of global commerce. As market prices are influenced as much by market expectations as by cold calculations, the risk to the dollar is much greater today than even three months ago.
Once markets start to waver, it could be easy, if the psychology is wrong and the level of risk too high, for a dip, in this case in the dollar and US Treasuries, to become a rout. Most market routs, of a day or a week or a month, are followed by at least partial recovery, and sometimes end in a new, more stable, long term price level. But a “non-reserve value” of dollar debt and US Treasury yields has gone untested for decades, while we have continued to pile on debt. Even if a rout finds its limit fairly quickly, the next downturn, and the next, will occur against a backdrop of decreasing confidence. Whether in a sudden cataclysm or in increments, we could face those higher interest costs, higher barriers to growth, lower capacity to weather downturns, and even economic freeze.
Perhaps worst of all, if markets lose confidence in our government’s credit, restoring it will require drastic measures. We will be forced, at some point, to reduce our huge stock of entitlements in a serious way. The wry jokes about not seeing Social Security benefits will start to become reality. Props to the economy, from agricultural subsidies to monetary expansion, will become untenable. Where perhaps more limited curbs imposed five, ten, or twenty years ago might have stemmed the deterioration, restoral of viability will come with deep hardships.
Of course it is entirely possible that a bill passes without great disruption this week, and/or that short term shutdowns are taken in stride by markets and in the economy. The bill on the table aims to set government spending through September. Perhaps we will only face the big questions then, or later yet. But the question will arise, and again three or six months later, and so on. Our economic underpinnings will remain under a looming, if blithely ignored, threat. The shame of it all is that few really understand the hazards, many who do don’t want to talk about it, and thus no one is even thinking how to deal with the crisis that will come, hopefully later rather than sooner.
Common Conviction 