Add NASDAQ's Robert Greifeld to the list of the CEOs who believe that the growing federal deficit is an existential threat to the country. At the Brookings Institute on Monday, Greifeld laid out a frightening vision for what would happen to the marketplace if the long-term deficit were left unchecked. "It is the same kind of deleveraging that we have felt since the financial crisis of 2008, but this could be on a much grander scale," he told the audience. "As all prices adjust, market forces could even reach a point where investors refuse to buy U.S. Treasury bonds."
Scary scenarios like that one have been a common thread in many leading corporate executives' pronouncements about the U.S. fiscal situation. But recent events and the current market seem to belie their arguments: Even after the United States was downgraded last year, interest rates reached historic lows, as demand for U.S. Treasurys rose in the face of faltering confidence in European and Asian markets. And the turbulence in the euro zone and the downturn in China don't look like they're likely to resolve themselves any time soon, which could keep demand for U.S. debt high and interest rates low in the near-term future: Rather than deleveraging and fleeing U.S. debt, global investors could continue to flock to it.
Greifeld acknowledged as much during his presentation on Monday. With the interest rate going below 1.6 percent, "that is kind of a happy state of affairs," he said. Greifeld argues, however, that it's just a matter of time before investors begin to wake up to reality and sour on U.S. debt. "At some point, this distortion will end," he asserted. "We do not deserve to be able to borrow that money so cheaply because, as a country, we have not yet demonstrated the vision or the courage to decide how we in fact will pay it back."
In other words, Greifeld seems to suggest that global investors are either misinformed, in denial, or reluctant to let the party end on U.S. debt. An interest rate of 1.6 percent is "disconnected from reality," he said. The question is if and when investors would really panic and turn their backs on the United States should the country fail to enact the large-scale deficit reduction that hawks are demanding.
At this point, the markets seem surprisingly confident that lawmakers will come to a deal to avert the austerity crisis. But it's possible that Washington could do so by passing a bare minimum agreement that wouldn't go nearly as far in reducing the long-term deficit as the budget scolds are hoping for. And it's entirely not clear how investors would react under that kind of scenario.
If executives like Greifeld are correct, it would spark a damaging loss of confidence in the U.S. government's fiscal prospects, a run on Treasury bonds, and a spike in interest rates. If the signals being sent by the bond market are correct, it wouldn't make much difference at all.