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Eric Lascelles of RBC Global Asset Management argues another debt downgrade is inevitable.
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Let's say the US is in recovery mode we have someone who says trouble could be brewing in the US is at risk of yet another rating downgrade.
Eric LaSalle as the chief economist with RBC global asset management he joins me now Eric good to see -- thanks for coming in.
Hello David -- another downgrade if it if it happens -- does it affect our economy.
Right well of course it's not a done deal at this point by any means but let's not forget as we start to sneak our way towards the end of the year a lot of very interesting things present themselves and other debt ceiling to be confronted perhaps in November the fiscal cliff I think we're all aware of right at the end of the year -- Increasingly it's heart rate of -- that we will.
See politicians emerge from this widowed and other -- -- debt downgrade pardon me simply seems quite likely on the back of the fact that a lot of talk about not engaging in the cuts promised.
Last summer when the last debt ceiling struck.
That sort of thing you end up -- I think quite likely outcome which is a debt downgrade.
If there's good news in this I don't mean to suggest there's a lot of good news but if there's good news I'm not sure the bond market's gonna care law the US has such an analyst in the first -- never did it I mean I I I I remember all of that worry and concern everybody is sweating about to happen.
And then not much that happened to our bond will that will that's exactly it and again the US has such a privileged status here if anything yields went down not up and so immediately consequences were almost -- You can look elsewhere big countries like Japan Japan's got an even more debt rating the consequences have been fairly small so the way I would put it is the downgrades are fairly likely.
But probably not going to have much of an immediate affect almost the biggest risk for the US right now fiscally is just that the market never sends that signal the good news about a -- a bond market pain is a can be just.
What the doctor ordered in terms of getting that political motivation to fix some of these deficits and excesses in the US simply lacks that and so the risk is ten years down the line you in the book a whole lot like Japan -- I don't know that's necessarily where we go.
But that's the downside when bond yields stay -- I've got another risk I'm I'm gonna risk putting up another graph at the risk of of more people either because it's -- -- extraordinary graph you look at it's a ten year yield.
A ten year treasury yield and they are down.
Practically to 01 and it just shows -- capacity of people.
To be willing did to swallow.
Practically a cost in terms of buying a ten year treasury right now how -- -- what is first of all what does that tell you about the economy.
Well it certainly tells me that risk appetite has not return in any way to something.
Normal when you adjust for inflation as you alluded to there's no real yield -- -- -- people aren't getting.
Any return -- being paid for inflation if that nothing.
More than that certainly -- so that's not a sustainable state of affairs is something that can endure for a few years -- has.
It's something I think that can perhaps endure for a few more years so long as these risks are quite large around the world's longest US growth to slow but.
We will see yields go up at some point I don't think to shocking levels but notably higher to more normal type levels to the force the -- -- used to Erica I think the biggest risk that the American economy has right now is that tax rates will go up all over the place on January 1 2013.
It I don't think that politically that's gonna happen I think Paul -- are gonna -- their heads together and and and stop it from happening but if it does if these tax rates go up what happens the economy.
Right well let let's frame it that way if the bush tax cuts expire the payroll tax cut expires at the EI extension expires and it.
The various cuts committed to last year don't go through.
Or pardon me rather do go through you end up losing about three percentage points -- economic growth now we're not growing by three percentage points year to begin with NC can fairly easily -- in the idea.
That a recession could be there now I agree with you I think it's fairly likely -- -- gets kicked down the road for a few of these things that's good news for the economy in the short run -- means we get to keep growing in 2013.
-- may be bad news in the sense that yet again we have not dealt with these fiscal -- so depends really what your time horizon here is which -- you want.
Erica -- sell RBC global asset management Eric thank you very much appreciate you being here.
