Washington and Wall Street at times don’t understand what the other is up to partly because politicians and traders choose to believe what they wish. Around the world, foreign investors are seldom sophisticated enough to distinguish between American political rhetoric and genuine policy.
Thus, financial markets always are vulnerable to at least a small shock when a U.S. “leader” shoots his mouth off on a sensitive subject without appreciating the consequences.
On Thursday Speaker of the House Newt Gingrich told a municipal bond group that he wouldn’t schedule a vote on raising the national debt ceiling, forcing a default on some debt issues, unless the White House agreed to Republican measures to balance the budget, reform welfare and overhaul Medicare.
Quick as a wink, and maybe a nod, the dollar sank against the Japanese yen, bonds plunged and stocks stumbled. Calm was restored with the general realization that the speaker was taking a negotiating posture and really wouldn’t allow a government bond default.
Indeed, on Friday, Gingrich backed off and said he would endorse a “very temporary” increase in the $4.9 trillion debt limit if the government was in danger of defaulting on debt obligations.
Unless the limit is extended, the Treasury will run out of borrowing authority around the end of October and couldn’t issue new bonds and notes to pay off principal and interest on existing debt.
