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"If Republicans Want To Shut Down Washington, They'll Have To Ask China's Permission First"
From Forbes
If Republicans Want To Shut Down Washington, They'll Have To Ask China's Permission First
Ted Cruz, a conservative Cuban American who is leading the current assault on Obamacare, has done more than anybody to bring the federal government to the brink of shutdown. What he has not considered is how America’s foreign creditors will react.
Although China, Japan, and other major creditor nations have no dog in the Obamacare fight, they have a strong interest in preserving America’s basic financial, economic, and social stability. From their point of view, Cruz, a junior senator from Texas and a Tea Party favorite, is not following the script. It is essential that he be smacked down – and he will.
Unbeknownst to Cruz, and seemingly to most of the rest of the Republican party, the creditor nations hold the high cards. If they were to sell just a small proportion of their American assets, they could send Wall Street into a tailspin. They are unlikely to do this but even if they were merely to slow the pace of their buying, bond yields would rocket and stocks could fall 15 percent in the space of a couple of weeks. A key thing here is that American asset valuations are at historic highs — the Standard & Poor’s 500 is on a P/E of 19 and long-term bonds yields are still near their lowest levels in many decades.
It is sometimes suggested that by triggering a sell-off, creditor nations would be cutting their own throats. Actually this is a characteristically myopic Western way of looking at things – a view that completely misunderstands how things have changed now that East Asians call the tune. The point is that the creditor nations are long-term holders who are largely indifferent to short-term fluctuations.
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Although China, Japan, and other major creditor nations have no dog in the Obamacare fight, they have a strong interest in preserving America’s basic financial, economic, and social stability. From their point of view, Cruz, a junior senator from Texas and a Tea Party favorite, is not following the script. It is essential that he be smacked down – and he will.
Unbeknownst to Cruz, and seemingly to most of the rest of the Republican party, the creditor nations hold the high cards. If they were to sell just a small proportion of their American assets, they could send Wall Street into a tailspin. They are unlikely to do this but even if they were merely to slow the pace of their buying, bond yields would rocket and stocks could fall 15 percent in the space of a couple of weeks. A key thing here is that American asset valuations are at historic highs — the Standard & Poor’s 500 is on a P/E of 19 and long-term bonds yields are still near their lowest levels in many decades.
It is sometimes suggested that by triggering a sell-off, creditor nations would be cutting their own throats. Actually this is a characteristically myopic Western way of looking at things – a view that completely misunderstands how things have changed now that East Asians call the tune. The point is that the creditor nations are long-term holders who are largely indifferent to short-term fluctuations.
Read rest of article
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