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Senate leaders finally hammered out a debt ceiling deal today (Wednesday) that avoided a looming potential debt default. It also reopened the government that has been shut down for more than two weeks.
Investors cheered the news and sent stocks up 205 points, or 1.36%, today.
While a deal solves short-term problems, it’s not doing much to help the long-term nightmare.
Legendary commodity investor Jim Rogers has been warning for months that the U.S. budget problems would end badly. On Tuesday, as the country drew nearer to breaching the debt ceiling, he reiterated that stance.
“We’ve been kicking the can down the road for 60 years,” Rogers told RT. “How do you think we got so much debt? We are the largest debtor nation in the history of the world. Every year that goes by we grow deeper and deeper into debt. Somebody’s got to solve this problem one way or another.”
Raising the debt ceiling is not the answer, Rogers stresses, but simply a temporary fix.
“Two or three years later we’ll be right back where we started, only the debt will be that much higher. Eventually the markets are going to say we don’t want to play this game anymore and we’re not going to lend you money at any price. America will then go into a steep and steady decline just as it happened in the UK, Spain, and many other countries over the last 200 years.”
Rogers’ cautionary comments came after a string of ominous messages recently from China, Japan, and the International Monetary Fund (IMF).
They have all been calling for the same thing: the United States to get its act together.
China and Japan to the United States: Stop the Shenanigans
Recalling the 2011 Capitol Hill deadlock that caused Standard & Poor’s to cut the U.S. credit rating to AA+ from a perfect AAA – and the financial pain that followed – China has grown increasingly anxious of America’s ballooning debt and fiscal shenanigans.
The world’s second-largest economy holds some $1.3 trillion in U.S. securities, making it the largest foreign investor in U.S. debt. The Asian nation recently told American lawmakers to get their act together and protect its hefty investments.
“We ask that the United States earnestly take steps to resolve in a timely way before Oct. 17 the political (issues) around the debt ceiling and prevent a U.S. debt default to ensure safety of Chinese investments in the United States and the global economic recovery,” China’s Vice Minister of Finance, Zhu Guangyao, told a press briefing held by the Chinese Foreign Ministry Oct. 7.
“The U.S. is the world’s biggest economy and a major country using reserve currency. Safeguarding the debt is of vital importance to the economy of the U.S. and the world. This is the United States’ responsibility,” he added.
And today’s debt ceiling deal just means we have a few more months until the problem arises again.
China’s official state news agency Xinhua published commentary Sunday that said since U.S. politicians had failed by then to strike a “viable deal to bring normality… it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”
“The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized,” wrote Xinhua.
Japan’s Ministry of Finance is also worried about the potential impact on currency markets. In the case of an eventual U.S. default, investors would sell U.S. dollars. That would sharply push up the value of the yen. The Japanese government has been “doing whatever it takes” to revive its moribund economy, including a massive stimulus program aimed at devaluing the yen.
Japan holds $1.135 trillion of U.S. Treasury debt, making it the second-largest investor behind China. Finance minister Taro Aso said that any country with large Treasury holdings will have to think about the consequences of the debt ceiling not being raised in a timely manner.
Bottom line: Even though we have a short-term debt ceiling deal today, there’s still a bigger issue present that these Washington budget shenanigans have created: a strike to U.S. credibility.
Or, what’s left of it.
And it’s this loss of credibility that makes another downgrade of the U.S. credit rating highly possible – especially if Congress continues its dangerous game of last-minute, short-term fixes…
- FOX Business News: International Monetary Fund Trims Global Growth Forecast
- The Wall Street Journal:
- Financial Times: China and Japan Warn US on Default