On the morning of Monday, Oct. 19, 1987, after some troubling trade data and Washington rumors over the previous week, stock markets around the world went into free-fall. Over that one day, the Dow Jones Industrial Average fell 22.6 percent, the largest one-day drop in the history of the index. Fourteen markets around the world fell by more than 20 percent, three of those by more than 40 percent. There were even widespread doubts about the stability of the entire financial services industry.
On the evening of Friday, Dec. 10, 2021, a wide swath of the eastern United States was beset by a deadly tornado outbreak. Nearly 100 people in five states were killed, with economic loss of about $18 billion. It was the worst tornado disaster in a decade.
An enormous amount of skill, effort and technology had been devoted to detecting such tornado outbreaks, and the prediction of this one was in fact far better than any in previous history. There was general notice days in advance, but for an individual tornado touchdown in a specific location there was at best 45 minutes’ warning.
These two disparate experiences show that meteorological — and financial — forces can quietly build, and then suddenly become critical and drive startlingly rapid and damaging change.
Tornadoes — and other meteorological phenomena — are caused by complex physical processes suddenly aligning to drive violent results that can cause enormous damage and loss of life.
Markets, on the other hand, are marked by complex human interactions and psychology, in addition to numerical and statistical variables. No mathematical model can predict how people will react to any given change of circumstances. However, we do have some history to guide us. Over centuries, governments have tried to ingratiate themselves with their citizens — or to feather their own nests — by spending more than they take in. It can be pleasant for the citizenry — for a time — to get more government than they pay for.
But ultimately, government debt is not totally different than household debt, even though many politicians would like you to believe it. The borrower must pay the interest and redeem the debt securities when they are due. Because governments are ostensibly immortal, they can “roll over” debt in perpetuity — if their lenders trust them. But if lenders observe borrowers having difficulty making payments, or borrowing irresponsibly, then the lenders will demand higher interest rates — or not lend at all.
And for a number of years, the U.S. government has been sending troubling signals to the financial markets. For most of the last 40 years, the national debt has been growing faster than the national economy — as though your mortgage balance were not only going up rather than down, but also going up faster than your income. For most of the last 20 years, with the financial crisis and the coronavirus pandemic, the debt has been growing hand over fist, much faster than before. The federal government has a legal “debt limit” — like a household credit limit — and has turned the passing of a law raising that limit from a formality into a horror movie. The Congress has rarely passed a formal budget over the last quarter century, even though it is required by law, and has almost always been late in enacting its annual funding of government agencies, sometimes even allowing an actual shutdown of operations. If you behaved that way, what would you expect would happen to your interest rates on a new mortgage or auto loan, or on your credit cards?
The federal government is vulnerable for two more reasons. For one, it relies on governments and investors from other countries for about half its credit. They will not cut us a break out of patriotism. And also, about one-third of all federal debt matures within one year. If interest rates rise, the federal government’s interest bill rises very quickly. One-year Treasury bills now yield a little over 1.5 percent. If that interest rate rises to 3 percent — still very low by historical standards — the cost of servicing those bills doubles. And the Treasury already struggles to pay the interest at today’s low rates. If rates were to rise to what they were 40 years ago, the results would be catastrophic.
People can protect their own lives when they receive a warning of a tornado. They can even run to shelter when a storm is imminent. But they cannot prevent the storm.
On the other hand, it is hard to run for cover in a financial panic; how can you sell when everyone else is trying to sell as well? But we can prevent a financial crisis — by just facing facts and getting our fiscal house in order.
The budget numbers are awful, and beyond the range of our experience. We are taking enormous risks. Meteorologists can tell us a tornado is brewing. Fortunately, like finding shelter from the weather, we can really do something about this coming financial storm, but we need to start now.
Joseph Minarik is the former senior vice president and director of research at the Committee for Economic Development, the public policy center of The Conference Board (CED), a non-profit, non-partisan, business-led policy center that delivers well-researched analysis and reasoned solutions in the nation’s interest. Dr. Joel Myers is the founder and CEO of AccuWeather and is a trustee of CED.