US default 'extremely unlikely'

Before we go deep into the mess, it is important to highlight the difference between a shutdown and debt crisis. In simple terms, in a shutdown, the government lacks the legal authority to spend money on non-essential services. In a debt crisis, the government is mandated to spend money — but doesn't have the legal authority to borrow the money to spend it.

What happens if the debt crisis occur (post 17th October) ? - A Default!

U.S. will certainly default if it does not pay its bills on time or the debt ceiling is not raised. Ahan - then the debt ceiling should be our discussion as it is the only temporary, please note, -TEMPORARY life line. If the US does not raise its USD 16.7 trillion debt ceiling "temporarily" by October 17, the country will default on its debt.

What US could potentially do:

The most extraordinary measure the government could take and that is to exhaust its cash. It is expected that the U.S. will have about $30 billion in cash, which will be short of expenditures that can reach as high as $60 billion in subsequent days. This is dangerously low level of cash in the bag.

The US government could use all their tax revenues to meet their interest payments on debt and roll-over the existing debt. They will have to take extreme measures such as cuts in public spending (healthcare programs) and defense spending. This will attract a lot of repercussion from the public, but it has to happen one day, then why not today!

President Obama is left with no option but to kill the fly

Even if the Congress decides to raise the debt limit, the republicans will be looking  for some very critical areas, prior to the approval, such as cuts in government spending, reducing the impact of Obamacare and no new taxes. They will keep their focus limited to the spending. An ice-break could prevent:

- Sliding US Dollar

- China catching the cold; biggest buyer of US debt

- America gets downgraded again!

- Banking industry getting banged
- Army pull-out

You are broke because you have overspent, and a correction is required not delay. Again, in simple words - Open the government and pay your bills.

Forgive me for using the word "Temporary" temporarily and wish not to use this again in near future.

An evening with Paul Donovan, Global Economist

I recently had the privilege to meet Mr. Paul Donovan, Global Economist, Managing Director UBS Investment Bank on September 23, 2013 in Dubai. Paul co-authors the Global Economic Perspectives publication with other members of the Global Economic team. Paul regularly appears on CNN, Bloomberg TV, and CNBC.
Paul, very comprehensively, covered various developments in the global economy ranging from the selection of US FED chair to the Japanese issuing bonds, devaluation of currencies and region-wise economic outlook.
There was a Q/A session which allowed me to put forward questions/opinions to Paul and I am glad he answered those questions to my satisfaction. The following were the communications exchanged

1 - Creation of Fake Capital

“I own apples and Paul owns oranges and we both agree to exchange each fruit worth millions. Paul sells me the oranges and I sell Paul apples. Next morning, we are no more fruit vendors but banks with assets worth millions. How this creation of fake capital is preventing organizations and economies to bounce back?" I related this to what happened in Iceland (shift from fish to investment banking) and other European economies.

Paul’s response: As this was the very first question to Paul that evening, he smiled to me and said that this is quite unfortunate and many bankers in the hall will not like us for discussing this. He added that banks have realized this and regulations are being brainstormed and developed to overcome these issues. Banks are becoming more systematic than before. He added that a bad situation in Euro will result in good outcomes. Many banks have recently either ceased or limited their operations in the Middle East and other regions. Banks like BNP Paribas have ceased operations in most of the gulf countries and Barclays has limited its operations too. These banks have been influenced by their respective countries’ governments to return and invest in their local economies. The increase in lending within the Euro bloc will improve the economic conditions over the medium term.

2 - Volatile Commodity Prices

“Theoretically prices decline when demand falls. Prices of coal, gold and several other commodities have either declined or remained volatile amid increasing demand trends year over year. What is to be blamed for low commodity prices? Am I right in saying that high capex is to be blamed for low commodity prices ?”

Paul’s response: “Yes, it is true that excessive capex in certain regions has resulted in volatile commodity prices. Expanding upon your statement mis-allocation of capex and resources is to be blamed for volatile commodity prices.”

3 - Asset Nationalization

“Asset rationalization, by Jan 2014, in countries like Indonesia can create serious issues in the global economy as China imports more than 80% of its bauxite requirements from Indonesia. What implications will this carry for the Global economy ?”

Paul’s response: “As a global economist I am more concerned whether the world’s global resource requirements will be fulfilled. China has invested in countries in Africa and has acquired mines, which it cannot fully rely upon because in the past sudden shifts in the governments in Africa has also caused disruptions in the mining activities and complicated ownership structure. As a global economist Indonesia must continue to supply raw material to China as China processes resources primarily for its local economy. Indonesia’s move is politically correct but not on economic terms because it has energy crisis and processing industries need adequate and cheap energy supplies. This move will worry the Chinese and will have a global impact.” 

And, the intellectual evening came to an end.