Onset of the storm

US Caspitol with "stop" sign

So the American government is in the process of shutting down. Yikes, presumably.

Except that as I write, shares are up a bit in Japan and only modestly lower in Hong Kong (well 1.5% down).

Why the muted reaction?

It is partly because there has been news seen as positive by investors from Tokyo (a twin track policy to raise more revenue from a sales tax, as a gesture to make a dent in Japan's egregiously huge national debt, and a capital spending stimulus).

And it is partly because the economic impact of putting 800,000 US public sector workers on unpaid leave and asking another one million to work for nothing will be gradual and incremental.

If, miraculously, Democrats and Tea Party Republicans reach an entente on the budget within a day or two, the negative effect on the recovery of the US economy will be fairly limited (IHS estimates that the daily cost in lost output will be just $300m - trivial for an economy whose annual output is 52,000 times greater).

Start Quote

The US remains the biggest and most important economy in the world”

End Quote

But, over time, all those gobbets of lost production would add up. And if the hiatus in government doing its normal business were to last about three weeks or so, as long as the last such snafu 17 years ago, US growth for the last three months of the year could halve - from a forecast of just over 2% (on an annualised basis) to nearer 1%.

Which would not be a disaster. But don't forget that for all the talk of the rise and rise of China, the US remains the biggest and most important economy in the world.

And, for all the recent volatility in markets caused by uncertainties over whether the US Federal Reserve would scale back its massive and unprecedented creation of cheap money, it was the recent revival of confidence in and about US prospects that has created an altogether better mood about global economic prospects.

Also, an even longer shutdown could lead to a proportionately greater losses of output:

  • workers, unsure when they are going to be paid, would spend less and less
  • the impact on tourism would magnify
  • there would be costs to the transport and travel industries of it becoming impossible to renew passports and driving licences, inter alia

As it happens, the fortunes of the US are particularly important to the UK. It is no coincidence that the British economic recovery has been on the coat tails of a reviving US, because America is the UK's single biggest export market, and one of the few important markets where we generate a current account surplus.

So a dampened US economy probably means a dampened British economy.

However none of this really matters a bean compared with the big looming storm cloud, which is that the US Federal government will run out of money in a few weeks, unless the GOP and President Obama patch up their differences and Congress votes to allow the government to borrow more than its current $16.7 trillion so-called debt ceiling (see The gathering storm? for more on this).

What does that mean?

For sale sign in the UK If the shutdown continues, mortgage borrowers in the UK may start to notice

Well, the government of the world's richest country won't be able to pay its bills as they fall due. Which is a bizarre, incredible idea. But given that the Tea Party and Democrats are divided by fiscal religion, it could just happen.

Here is what is scary about that prospect.

If the US government were to fail to repay one of its bonds as it fell due, or not pay interest on some of them, that would not mean that all US Treasury bonds were in default (in the jargon, there are no cross default clauses). But it would mean that the perceived quality of all the trillions of dollars of bonds it has sold would deteriorate (here is one of my "dear grandma, love egg" moments - when a government issues a bond, it is borrowing from investors).

That would lead to a fall in the price of those bonds. And, to remind you (sorry), when bond prices fall, the yield on them rises - which matters to all of us, because the yield on US Treasury bonds is the benchmark interest rate for all of us, so a fall in the price of US government bonds would lead to higher borrowing costs for more or less everyone.

This means you, if you are a mortgage borrower in Skegness, for example, or a business in Rio. And you don't need telling that a rise in the global cost of money would not necessarily be ideal at a time when we are only just beginning to climb out of the economic slough of despond into which we were rudely thrown five years ago.

And there is another thing.

Apparently, according to RBC capital markets, it will be impossible to actually know for possibly a day or so after Washington has failed to pay interest on a bond or bonds whether the default has happened and which bonds are in default (see the FT's Alphaville).

Woman looks out window over Rio And the ripples will continue to spread

That would take us back to the nerve-wracking uncertainty of 2007 and 2008, when investors shunned whole classes of securities and indiscriminately boycotted big financial systems, because they couldn't see which were sound and which bust.

The point is that US Treasuries are the collateral of choice underpinning more credit creation than any other class of financial product. And if all treasuries were tainted by the impossibility of knowing which were actually in default, well a spanner the size of an asteroid would be inserted into the global system for manufacturing loans.

Scary? Yes.

So scary that Congress will never allow it to happen?

Presumably - though the longer the uncertainty persists, the more that investors will fear that the worst could just possibly happen, and that in itself could increase the price of money.

UPDATE 11:55

It is official: I am an idiot.

The Hong Kong stock market was closed today, so the fall in shares there to which I referred earlier happened yesterday, in anticipation of the partial shut down of the American government.

But my point still holds: markets are thumbing their noses at the breakdown of decision-making in Washington; European shares are up (a bit) this morning.

And another thing. Everyone (I mean everyone) tells me that the US will never default on its debt and interest payments, that they would direct whatever tax revenues are coming in to service what is due on Treasury Bonds.

Which implies that the default would be on payments to stationery suppliers, or defence contractors or civil servants.

Whoop de do, as they say. I am not sure that is so much better than keeping bondholders whole.

An inability to pay what it owes would not exactly do wonders for the credit standing of the world's most powerful government. And, pending agreement on a new budget and debt ceiling, there might be implications for the credit ratings of US official debt and US banks (whose own credit ratings are too intimately linked to the ratings of the governments which stand behind them).

An across-the-board downgrade of US official and quasi official debts - the debt that rules the world - would precipitate unthinkable turmoil in markets.

So, of course, it won't be allowed to happen (I suppose).

Robert Peston Article written by Robert Peston Robert Peston Economics editor

Why is the Treasury's interest rate so low?

How should the government take advantage of the record low interest rates it pays?

Read full article

More on This Story

More from Robert


This entry is now closed for comments

Jump to comments pagination
  • rate this

    Comment number 492.

    80. FauxGeordie

    Osborne's chief policy seems to be to throw as many of the population as possible into debt slavery to his paymaters
    inflation if you have wage increases gets you out of debt, the biggest financial issue I've known since 1997 is the failure of wages to increase
    & I believe Labour/EU migration policy did that so they didn't have to have a prices & incomes policy as per the 1970s

  • rate this

    Comment number 491.

    Gavin Hewitt and Mark Mardell seem to have taken the summer off and there's not much happening on their blog sites.Wish I had a job like that. Linda Yueh and Damian Gramaticas when they do open a discussion close it for comments within hours, a day at most. Comments are limited to 400 characters and only once every ten minutes.And they say BBC ISN'T going downhill?Have your say or just shut up?

  • rate this

    Comment number 490.

    A good time for Tory Nick Robinson to close down Comments on his blog
    He doesn't want to hear the truth, just the fantasies of the Oxbridge-miseducated misLeaders of the 3 political parties
    The unemployed are in class revolt against jobs that the ruling class should do, instead of exploiting us. After generations of doing lousy jobs, they're our frontline against the rich & powerful
    Back 'em 100%

  • rate this

    Comment number 489.

    Onset of the storm? Nooooo, this may be the calm BEFORE the storm. If default occurs, the entire world's economy will be thrown into shock. It will be impossible to determine the monetary value of anything as the US dollar is the ultimate benchmark.Financial experts on PBS say the onset of recession in the US will be immediate.Nobody knows how great the impact will be but expect severe and global

  • rate this

    Comment number 488.

    465.stan "Lear"!

    I didn't get away with treating Bankers like Gloucester did I!?

    Let's try Beckett's 'Happy Days'. We are like Winnie, up to our necks in sand. But I must avoid extending metaphor beyond its capacity (KT)!

    We need metaphor to describe the economic horrors of our time for the reality is both too prosaic and too ghastly.

  • rate this

    Comment number 487.

    ..But spend, spend, spend strikes me as inherently wrong in the face of a debt ceiling

    The debt ceiling is an entirely artificial construct, it has no economic Raison d'être it exists purely to allow those who think national debt is a cataclysmic problem to make it a cataclysmic problem when it otherwise wouldn't be & so justify their predictions of doom

  • rate this

    Comment number 486.

    "didn't intend

    Words repeated as implicit accusation, 'a technique of persuasion'. Perhaps you stumbled into rhetorical invention (maybe to assist in argument with self as much as to persuade others); but more likely echoing a favourite of anti-re-distributional & / or anti-public-service & / or simply anti-tax politics. A charge of "excess" would need democratic upholding

  • rate this

    Comment number 485.

    472 FallinTP

    Pray tell how those at No's 10 and 11 made their wealth through endeavour. They didn't they have rich parents

    Oh yes the Kinnocks were a shoe in until the Tories ditched the Old Witch following the Peasant's revolt MK II. I was there and didn't see any City Spivs come out to the streets to defend her.

  • Comment number 484.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 483.


    I didn't intend "spend, spend, spend" as political rhetoric - more a point about basic house-keeping and financial restraint. It strikes me there is an element of "excess" in the way the US has been operating. Or am I mistaken?

  • rate this

    Comment number 482.

    "point I want to come back to"

    Concern shared on possible impact of government paralysis, on local staff, customers & markets, perhaps then on more people, around the globe. We owe it to ourselves & each other, of course, to understand the world around us, even that of arcane finance. The 'political' rhetoric is part of it - 'spend, spend, spend' - but needs to be understood as such

  • rate this

    Comment number 481.

    No470 MT Wallet

    'Edwina's friend'

    Well, well, a reference to 'back to basics' 'Old John'.

    Is that the one who was keen on making speeches about the sanctity of family life?

    Even the 'decent' Tories can't be trusted.

  • rate this

    Comment number 480.

    freetinks @459
    "Ayn Rand
    ideas don't appear mad"

    Not mad, just from a differently constituted perspective: organic psycho-sociopathy; or sub-cultural pseudo-sociopathy; or socialised in a self-destructive society near to its own death, unable to learn from the history or other cultures of the world. To understand Ayn Rand you need to look up psycho-sociopathy, and probably not be Ayn Rand?

  • rate this

    Comment number 479.

    The point I want to come back to therefore is why can't Obama accept the deal he made as regards the debt ceiling? Why won't he cut costs? If he can't afford the military, then why not bring the troops back home say. The exact choices are up to him. But spend, spend, spend strikes me as inherently wrong in the face of a debt ceiling.

  • rate this

    Comment number 478.

    I agree with you about freedom and choice and (in case anyone is wondering) I do give away lots (by choice) to charity and do random altruistic deeds to help others.

    But at college I had no choice as monies were deducted from the grant college paid out to me! Therein lies a distaste of others spending on my behalf - nothing to do with Ayn Rand's ideology but my own life experience.

  • rate this

    Comment number 477.

    The shutdown is just the preliminary.It's the debt ceiling which should really concern the world.On Oct 17 if the debt ceiling isn't raised, the US gov't will have a choice, print enough money to pay the latest installment or default. Either will be calamitous for the world's markets and economy but default will be the worse of the two.The most reliable bonds in the world will become unreliable.

  • rate this

    Comment number 476.


    That was nothing to do with socialism. Socialism has to be free and voluntary or it won't work for the very reason you state. Of course, people claim it is socialism as it legitimises their agendas.

    You should have done what the people who organised the arrangement did; namely pretend you had given.

  • rate this

    Comment number 475.

    Civilisation means treating people with respect including those who don't want to be part of a socialist society...What turned me against socialism was being forced to give part of my battels to charity (majority common room vote) when I wasn't getting the full grant because my parents chose not to top it up. Too many people bash those they THINK are rich. I did not have money to spare.

  • rate this

    Comment number 474.

    470 and 463

    In the dying years of the last Labour administration Lord Mandelson as head of what used to be called the DTI did a very effective job propping up industry and saving jobs. Being fairly close to one factory he saved, I changed my view of the man. He is a political fixer and that is an art form, but don't be tough on the guy as he helped a lot of good people. That matters.

  • rate this

    Comment number 473.


    It is not possible to comment on Ayn Rand without remarking on the mind-set of said woman. Her underlying alienated attitude to society at large has provided legitimacy on the one hand to the greedy and on the other hand to a new bolshevism which is equally destructive but in a different way. Both are obnoxious to our civilisation and need to be condemned in the strongest terms.


Page 1 of 25



Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.