As Americans shake their heads in the aftermath of the debt ceiling tug-of-war they find nations around the world doing the same thing.
This sentiment was echoed by Pimco’s Mohamed El-Erian who felt the central problem has not been dealt with. What that central issue is varies depending who you talk with.
If the discussion is with a conservative/tea party type, the problem is that we are living beyond our means and spending too much money. The remedy for this entails cutting spending (don’t even think of increasing taxes) and promises to be a fairly painful process and hence the resistance.
If one confers with a liberal/progressive, the issue is that we should be able to keep doing what we have done for decades and we should just give ourselves a higher credit limit. Never mind the Chinese who hold a major portion of our debt and wag their finger at us to complain that increased spending out of thin air is just another form of default.
The consequences of this approach could be even more painful down the road but it is easier to kick the oft-kicked can down the road. No wonder the Chinese have busied themselves with buying gold coins as fast as they can to protect themselves.
Mr. El-Erian worries that the underlying issues have been merely pushed under water and will resurface in a few months gasping for breath. Instead of “some great compromise” that could have ended the impasse, both parties were just too exhausted to continue and great damage was done in the process.
Dennis Gartman, the founder of the Gartman Letter, observes that messing with default in this way has led some U.S. investors to transfer their cash into foreign assets. In addition, he believes foreign investors will also be inclined to take their money out of the U.S.
“Will foreign investors continue to move money to foreign investment? The answer to that is resoundingly yes,” he laments. “I suspect the damage had been severe and probably permanent.”
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