According to the analysis of Nobel laureate Paul Krugman, the United States may be inching closer to default and the debt ceiling should be abolished. What are the implications of this for global financial markets? The following are some possible trading recommendations:
– If the U.S. defaults, the U.S. dollar will depreciate sharply and gold and other safe-haven assets will be favored. Therefore, consider going long on gold, yen, etc. and short on the dollar, U.S. stocks, etc.
– If the U.S. takes backup measures, such as minting $1 trillion in coins or issuing premium bonds, to avoid default, then the U.S. debt problem will be temporarily alleviated, but there are still risks in the long run. Therefore, you can consider going long the dollar and U.S. stocks, but pay attention to risk control and timing.
– If the U.S. two parties can reach a compromise and raise the debt ceiling, then the U.S. fiscal situation will be stable and market confidence will be restored. Therefore, you can consider going long the dollar, U.S. stocks, etc. and short gold, yen, etc.
The original article is as follows:
Nobel laureate in economics Paul Krugman (Paul Krugman) recently said that the United States may be inching closer to default and that the debt ceiling should be repealed.
Krugman, a leading American economist and former professor of economics at Princeton University and currently a professor of economics at the City University of New York, was awarded the Nobel Prize in economics in 2008 for his “analysis of trade patterns and regions of economic activity.
“The possibility that the federal government will soon be unable to fund its normal operations has become very real.” Krugman warned in an op-ed in The New York Times on Sunday.
But he said the U.S. fiscal situation is not as bad as other countries that have defaulted on their debts, such as Greece in 2009.
If the U.S. defaults, Krugman said, it will be because House Republicans are trying to use the debt ceiling to extort policy concessions that would be impossible to obtain through the normal legislative process.
The crux of the current bipartisan difficulty in reaching agreement on the debt ceiling is that Republicans want to bundle raising the debt ceiling with cuts in government spending, making spending cuts a condition for raising the debt ceiling, while the Biden administration wants Congress to raise the debt ceiling unconditionally, as it has in the past.
Further elaborating on the merits of a fallback measure
Krugman further elaborated on the merits of his own previously proposed fallback measures that the Biden administration could take to avoid default.
One would be to mint a coin with a face value of $1 trillion to be deposited with the Federal Reserve, and another would be to issue premium bonds, debt securities that would be sold at a price above face value. In effect, both measures would allow the government to borrow more money even if lawmakers fail to raise the debt ceiling.
Krugman noted that even if the U.S. sells premium bonds at a price above par, it is not the first country to manipulate its debt. He noted that until 2015, some of the U.K.’s debt was bonds that paid coupons but never matured (perpetual bonds), which meant they had no par value.
No debt ceiling should be set
Krugman also believes that the debt ceiling should be abolished because it has been reduced to a weapon for extremists.
“You might ask how we should enforce the debt ceiling if the government can play around with the definition of debt. But the answer, of course, is that we shouldn’t have a debt ceiling. The government should be making decisions about taxes and spending and considering the fiscal consequences, not creating additional bottlenecks that extremists can use as a weapon.” He wrote.
Right now, the deadline for a U.S. debt default is looming, with Treasury Secretary Janet Yellen estimating that the U.S. government will run out of cash as soon as June 1. Experts warn that if the debt ceiling is not raised in time, it could trigger a financial crisis.
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