Debt ceiling wrestling matches or de-dollarisation
By Peter McGahan
June 2, 2023
RELUNCTANTLY, I write about the US debt ceiling farce. Why? Because headlines are everywhere describing all the potential chaos around the likelihood for the US to default, and each journalist wants the public to read their wonderful variation.
In short, if they defaulted, we are all probably nuked to one degree or another, so describing the impact of the weather on your flowers in varied columns is like stopping a tsunami with those cheap pub toilet tissue papers. Pointless, but it might get attention.
Google ‘debt ceiling’ and you’ll see it repeated over history like ‘A Place in the Sun’. Same old twaddle. Watch the videos, read the previous headlines, or just watch any TV programme. We know how it starts, what happens and how it ends. Avoiding the above nuke is a good plan that no government wants to have on their already dodgy cv.
Donald Trump (USA’s answer to Mussolini and the other cheek to the backside that is the US system) is encouraging Republicans to default. Long sigh.
Financial markets go nuts amid all the above possibilities and sit awaiting the puff of white smoke from the White house chimney that says: ‘Tiz grand, it’s all sorted’.
The US has it set in law that both parties need to agree any debt ceiling increase so it becomes a farcical process where the ‘other side’ uses this moment to negotiate terms they disagree with elsewhere. You could argue it’s a good thing as a check and balance for the US, but not I.
Janet Yellen, has of course assisted with apocalyptic comments (noises) that the government needs to look down the side of the sofa and car seats for a few hundred billion before the second week in June or they are out of cash – default.
Threatening this by using it as a bargaining tool is something my cat wouldn’t do, even after studying economics for a whole week on YouTube. The cost of credit would rise for not only the Fed, but the man on the street, businesses and US states, in an already weakened and bewildered economy. I don’t have the space to talk about the de-dollarisation risk. Its real and they don’t need the above risk on top.
The issuance of a trillion-dollar platinum coin gets around the problem. The Treasury mints one and gives it to the central bank in return for a trillion dollars. Rather amusingly, this ‘Get Out of Jail Free’ idea was first proposed by the Republican party. If you think that sounds a bit like quantitative easing, you’re on the money.
Most economic observers, including your author, see a default as realistic as one of those World of Sport Saturday afternoon wrestling events (while I stare at the audience who believe it’s real).
If this article comes back to bite me, it will be through the most extraordinary bout of wrestling stupidity. Having: “I created the environment to trigger a default that threatened the privilege associated with being the world’s reserve currency, crippled the US financial system, plunged the world into recession, delighted China, and er, oh yes, pushed up the cost of debt servicing”, is not only a lot to get onto a CV, but would probably make you a tad unemployable.
You can actually buy insurance against alien abduction (I’m not recommending that for the record) and you can also buy insurance against defaults by governments on their debt. Incredibly, it currently costs more to insure against a default by the US than by South Africa, Colombia and Greece. Does this reflect the reality of a default or just people’s fears? Ask someone who has recently renewed their alien abduction insurance. But don’t pay too much attention to their answer.
In the meantime, all of this doesn’t help the potential for de-dollarisation. The dollar – a national currency, weaponised as a global payments currency, is under attack. The US’ rivalry with China, Russia, Iran and North Korea are not welcomed by me or those on the receiving end. You will have seen the emergence of central bank digital currencies that loosens the necessity to clear through the dollar. Many countries have already started to do this.
The US global GDP has halved to just 20 per cent since the second world war, yet over 66 per cent of the so called vehicle currency transactions are in the dollar. De-dollarisation a bigger threat.
If you have a financial question for Peter, please call 01872 222422 or email info@wwfp.net or visit us on www.wwfp.net
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
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