terms of behavior, in the more than 200 years of American independence, the
U.S. Treasury has never allowed a delay in payment on its bonds. In the case of
a default, gone will be the beacon of zero risk. The global economy will be
without a compass - adrift. As a consequence, the entire financial system, tied
as it is to U.S. Treasury bonds, will be illiquid and experience a general
Ever since the Declaration of
Independence, Americans have issued Treasury bonds - as all countries do. These
securities are issued to meet the government's fiscal needs until in
anticipation of tax receipts and other budget revenue. Such bonds, by their
nature, are middle- and long-term, yielding a particular interest rate (generally
speaking). Thanks to the behavior of American governments in the past, these bonds
were always impeccably honored at maturity.
We live under the aegis of
the capitalist model. That is, all enterprises entail business-oriented risks.
Such risks may differ, ranging from that derived from a market collapse,
administrative inefficiencies, disorganization, technical or technological
obsolescence, etc. Thus, any business (if private) that requires investments
from capital markets, faces risks derived from their economic activity. The
word risk embodies the concept of “a condition with potential for damage
or loss.” This, in turn, is an unplanned cost or expense that may or may not be
recoverable. Risk is present in all financial market activity. This is a
multidimensional concept that falls under four main groups: market risk,
operational risk, credit risk and legal risk.
Speculative risks, by their
nature, depend on the overall behavior of society, which depending on how people
see the health of the economy, may need to weather variations between supply
and demand; credit and liquidity; and changes in legislation, productivity and
profitability, and even media. But the analysis must go deeper and take account
of ethical considerations on the part of those involved in the breakdown of
compliance with contract provisions. Everything is tied to a singular invisible
force: mutual trust. Since human beings are fickle and inconsistent, we live perpetually
under the threat of risk.
The central concern of
economic agents is invariably the risk inherent in financial liquidity. In
other words in this case, when we agree to cover bonds until maturity, this is so-called
cash flow. In any analysis of profitability, the risk of liquidity is invariably
present. For comparison, we always use a parameter that serves as zero risk. That
is, a financial asset that has no risk of non-payment at maturity. Those who
work in the capital markets are well aware of this terminology. In terms of
behavior, in the more than 200 years of American independence, the U.S.
Treasury has never allowed a delay in payment on its bonds (aka/Treasuries). To
market analysts, this has always been regarded as the sole zero-risk asset. It
has served as a sound basis for all global investment, as well as providing
security for liquidity in the global financial system.
If in his “final mission” and
with the permission of the American Congress, Obama is unable to avoid a default
and stomach the monstrous deficit ($14 trillion), it will be the first time in
history that America has gone into a default. Gone will be the beacon of zero
risk. In other words, the global economy will be without a compass - will be
adrift. As a consequence, the entire financial system, tied as it is to U.S.
Treasury bonds, will be illiquid and experience a general crash. Will this be a
global economic debacle? Will it be the beginning of a new global recession, as
Paul Krugman (2008 Nobel Prize in Economics) warned over ten years ago?
Sebold is an economist and graduate professor at Uniasselvi - Blumenau (SC)
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