America’s Locust Years
BERKELEY – It is hard right now to write about American political economy. Nobody knows whether the debt-ceiling tripwire will be evaded; if so, how; or what will happen if it is not.
If no deal to raise the debt ceiling is reached by August 3, interest rates on United States Treasury bonds could spike, or they could remain stable, as investors decide they have other problems to worry about. Or the US Federal Reserve, the Peoples Bank of China (PBC), or both – or even some other body – could support the market. Or interest rates could rise if people expect a much weaker global economy – and, in a weaker global economy with no inflation, investors should be holding more US Treasuries, not fewer.
Frankly, no one knows what legislative deal will be struck to raise the debt ceiling. All we know as of this writing is that a deal would probably involve cuts in near-term spending, meaning weaker growth and higher unemployment over the next 18 months. And we can assume that it would be repealed and replaced by something else come January 2013, either by a re-elected President Barack Obama, or by a new, Republican president.