Kash’s Call #3: A Financial Crisis in the US?

My third prediction: there will not be a major financial crisis this year in the US, a la Argentina.(*)

Why not? Many of the ingredients for serious financial problems are in place for the US right now: massive government borrowing with no realistic prospect of future fiscal responsibility; enormous borrowing from the rest of the world in the form of the current account deficit; corporations and individuals that are burdened with historically high debt burdens; eroding confidence in the dollar.

However, there’s one big difference between the US and an Argentina or Thailand: all of our domestic and foreign debts are denominated in our own currency. This means that if there’s a loss in confidence in the ability of the US to repay its loans, then foreign investors will stop investing in the US (and may withdraw some of their investments), long-term interest rates will go up substantially, the dollar will fall substantially… but that will be the end of it. There will be no follow-on effects to cause a general financial crisis such as typically happens in a developing country in the same situation.

Over the coming year there will probably be a significant tapering off of foreign investment in the US – in fact, we may already be seeing this happen, according to some. The possible exception is the Asian central banks – they may keep buying dollar assets to keep the dollar from falling further. But any net reduction in the foreign willingness to lend to the US will happen gradually, not in a sudden, dramatic shift. The result will be further erosion in the value of the dollar over the year, and a gradual but significant increase in long-term interest rates in the US. But no crisis.

The US is not at risk of being the next Argentina. But that doesn’t mean that the consequences of the US’s excessive borrowing from the rest of the world will be pleasant.


(*) Some might argue that it’s cheating a little to predict what won’t happen, but since many people have expressed concerns about the US heading for an Argentina-like crash, it seems fair game to me.