Focus remains on Washington DC with Congress unable to reach a deal on spending, which has caused the government shutdown, or the looming debt ceiling, which is the bigger issue as technically the U.S. could default on its debt, and the two issues are becoming increasingly rolled into one. Risk off is the theme with the aussie slipping below 94 U.S. cents and the dollar trading below 97 yen on Monday and barely doing better on Tuesday. While Rome burns, FX investors are likely to take their cues from stock markets with nothing else to drive sentiment. The U.S. unit does have a small safe haven bid if nothing else.
But while it is unlikely there will be a default at least some investors are growing more nervous. President Barack Obama cancelled his trip to the ASEAN summit and the Chinese Vice Finance MinisterZhu Guangyao warned time was running out and the US should ensure the safety of Chinese investments.
The problem may be that the average American has yet to feel any pain. The sequestration, which was supposed to be beyond contemplation, has had a direct impact on very few or at least none that most have noticed. Media headlines may shout out negative connotations about the government shutdown and it’s problematic if you want to visit a national park on vacation but no one is hurting. And unless borrowing costs rise sharply, hitting car loans, mortgages and credit card spending, the talk of a debt default is mostly academic for a factory worker in Chicago, a shrimp fisherman in the gulf or a potato farmer in Idaho. So leaders in Congress don’t feel any urgency. They will act but perhaps it will take something dramatic for Congress to feel any pressure. Congressional leaders like to win elections.
Of course, whatever they do will only be another bandage on the fiscal issues rather than a long term solution to the growing amount of U.S. debt. That problem is going to be kicked further down the road for another set of Congressional leaders. Perhaps a little pain for the average American may not be a bad thing if it leads to a healthier economy longer term.