⚠ Is America riskier than we think?
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The Essay
Many disruptive scenarios could afflict America that, while not as wildly dramatic as the state-versus-state military conflict depicted in the dystopian thriller Civil War, would still have significant consequences. Electoral crises, prolonged budget impasses, or erosion of central bank independence might not make for gripping cinema, but they could seriously impact the country's stability and prosperity.
America, for now, remains widely perceived as a place where really bad events simply don't occur. It’s why the US economy benefits from a "safe harbor premium." Global investors highly value our reliability and predictability compared to other countries. They still believe that America's robust institutions, sound financial system, independent central bank, dynamic economy, and stable political system make it a low-risk place to allocate capital. Financial analyses typically assume the US is the "riskless" benchmark and assign it a country risk premium of 0 percent. Consequently, the United States enjoys lower borrowing costs and attracts substantial foreign investment, which supports economic growth and boosts asset prices.
If perceptions of US stability were to erode, however, the safe harbor premium could diminish, leading to nasty economic repercussions. Consider: By one estimate, the UK has a country risk premium of 88 basis points, up from 48 basis points in 2017, the year after the Brexit referendum. If for whatever reason the US risk premium matched the UK level, US real GDP would be 1 percent lower than otherwise after decade, while average US household wealth would decline by nearly $50,000
Those estimates come from a new report by former Biden White House economist Ernie Tedeschi, now director of economics at The Budget Lab, a non-partisan policy research center at Yale University. And they’re numbers worth keeping in mind given that Tedeschi thinks the US likely doesn’t have a true 0 percent risk premium, even though many conventional models assume it does. Two key points here:
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