In their never-say-die efforts to defeat Obamacare, Tea Party Republicans brought the federal government a giant step closer to shutdown last night. What they seem not to have considered is how America’s foreign creditors will react.
Although China, Japan, and other major creditor nations have no dog in the Obamacare fight, they have a strong interest in preserving America’s basic financial, economic, and social stability. From their point of view, the Tea Party contingent is not following the script and a corrective may be necessary.
If the creditor nations were to sell just a small proportion of their American assets, they could send Wall Street into a tailspin, with unpleasant implications for the net worth of many Republicans.
They are unlikely to push things that far but even if they were merely to slow the pace of their buying, bond yields would rocket and stocks could fall 15 percent in the space of a couple of weeks. A key thing here is that American asset valuations are at historic highs — the Standard & Poor’s 500 is on a P/E of 19 and long-term bonds yields are still near their lowest in decades.
It is sometimes suggested that by triggering a sell-off, creditor nations would be cutting their own throats. Actually this is …