The government of the most important country in the world continues to astound the rest of the world with its inability to resolve a domestic matter that gets more damaging to its credibility every day. Perhaps the biggest surprise is just how calmly the markets in general are coping with this issue. The answer lies in history – not just looking back at what happened last time we had such a shut down, but in the implied confidence of investors in US assets to see the current problems as nothing more than just another bump in the road.
The rest of the world has had very little choice other than to invest in the US, simply because of the size of its capital markets. Real alternatives are growing however, and confidence in the government of the US to provide a solid framework to support the world`s major reserve currency is essential in maintaining the status quo. The current administration, with its ability to turn internal issues into world concerns, might be accused of taking the historical position of the US as the hub of the financial world for granted.
I am not trying to say that this current domestic issue will have a devastating impact on the US, but the world is expecting a resolution to this soon, and it is certainly not expecting a similar and potentially more damaging scenario to unfold in the middle of this month. America may not be lightly forgiven by investors in the medium term if it fails in the short term.
The habits of world finance are changing. The financial community should be aware of the significant moves already taken to reduce the role of the dollar in international trade; China, Russia and Japan have recently signed agreements to use their own currencies when trading with each other, and similar moves are being considered in other countries. The US may have a larger problem on its hands in the future if it fails to convince the world that it is capable of fulfilling its history of competence, current events give investors unnecessary reasons for doubt.
