November 18, 2011
Morning Edition had a piece warning us that the markets will be hard hit if the supercommittee doesn’t reach a deal (sorry, no link yet). It attributed the decline in the stock market in the period around the debt ceiling battle to fears about default, even though bond prices actually rose in this period. Bonds are the asset on which the U.S. government might theoretically default.
So in NPR land, when investors increasingly fear a default on U.S. government bonds, they bid up the price of bonds. However, fears that government bonds will default makes investors less willing to hold stock.
This makes sense as something to say if your agenda is to force Congress to cut programs like Social Security and Medicare. If you’re looking for a more coherent explanation, the markets were responding to the prospects of a meltdown of the euro. This raises the prospect of a post-Lehman type freeze up of the financial system. That would be very bad news for the stock market and is the most obvious explanation for movements in the financial markets.
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