Mutual fund president addresses realities of default
By Dian Vujovich
The list of problems the shutdown of the government has caused grows day by day. In addition to the no-pay-until-later that the hundreds of thousands of working furloughed workers are experiencing, the holes left by others not back to work yet has meant everything from a way too limited CDC to parks closed, etc. Then there are the prices at the pump: Gas is cheaper than it as been in six months. As for the yet-to-be-disclosed data, I’m guessing it won’t be long before a few deaths will be directly attributed to this way unnecessary shutdown.
And then there’s the debt.
Paul Schott Stevens is president and CEO of the Investment Company Institute (ICI). That’s the trade association for registered investment companies such as mutual funds, closed-end funds, exchange-traded funds, and unit investment trusts.
Stevens will address the Senate Committee on Banking, Housing and Urban Affairs on Oct. 10th focusing on the impact a default would mean to our country’s financial stability and economic growth. In his speech he reminds us that the current debt of $16.7 trillion is 85 percent higher than it was six years ago. As such, it’s larger than the U.S. economy and represents 105 percent of our GDP. Only one other time in our history has that occurred—after World War 11.
If America were to welch (my word not Stevens’) on its debt and the Treasury delay any payments, he points out that “investors will earn a lesson that cannot and will not be unlearned.”
“That lesson is simple: Treasury securities are no longer as good as cash—they carry a future risk of missed payments. That risk will be priced into the interest rate that investors demand, and into traders’ reluctance to treat Treasuries as liquid,” writes Stevens.
If that were to happen, we, as in all of us in America along with citizens in countries around the globe, can kiss goodbye any warm fuzzy beliefs we held about “the full faith and credit” of anything issued by U.S. Treasury.
Losing faith in anything—from the one you love to the money you expect to receive each month—is always disastrous.
The U.S. does have a debt problem, for sure. But debt has been part of our world since the country began. While the amounts of our debts have increased and decreased throughout the decades, accurately forecasting how much they will amount to in the future really isn’t possible because the future is —and always has been—unknown.
On the other hand, what we do know for sure is that a growing economy can make a big dent in our nation’s debts.
How do we grow our economy? By getting back to work.
To read more articles, please visit the column archive.