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Debt Ceiling Woes

    July 20, 2011

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As we sweat through mid-July, fearless leaders from both parties continue to dish out compelling soap-opera entertainment concerning the August 2 deadline for raising the 14.3 trillion debt ceiling.  It is generally held that we must meet the Aug. 2 deadline in order to avoid technical default, and that the consequence of such a default would mean we’d only be able to fund fifty per cent of budgetary obligations outside of debt interest payments.  Every day, it seems, each party has conjured up some novel proposal, ranging from Obama’s Grand Bargain, to the Three Installment Abatement offered by Sen. Republican leader McConnell. 

Despite the grandstanding, neither party is having much success in striking up unanimity.  Obama is having serious problems with those Democrats who are respecting Pelosi’s line in the sand regarding spending cuts on social programs, and the conservative branch of Republicans in the House are backing their leader Eric Cantor, resisting any revenue increases including elimination of tax loopholes.  The future seems to hold nothing but confusion and confrontation

But even though the media has portrayed the lack of agreement as a “desperate situation”, the reality is that – to a large extent – these last minute rhetorical fireworks are merely the verbal manifestations of a phony war.  The honest truth is that there will be no default, as it would be political suicide for both parties – with Republicans likely getting the lion’s share of the blame. Both financial and commodity indicators have confirmed this, seeing as there hasn’t been any significant downward jolt in the markets over the last month.  There has been range trading, with some bullish charge in the grains due to the crop report of July 12.  And the gold market has indeed shot to record highs in the $1580’s, but that was more in response to issues like the European debt crisis in the Euro-zone, weak economic reports in the West, and the ongoing Arab spring -- particularly the Syrian situation.

Rest assured, if the markets honestly sensed there was such a good possibility of default, the Dow, S & P, and bond markets alike would all have collapsed by now.  In reality, the securities markets have trended only slightly down, and the 30yr bonds experienced a record day of buying on July 14th; if the conservative Asian markets are still willing to buy the U.S. markets, there’s little risk of any economic collapse.  Financially savvy investors know that the U.S. has never defaulted on its debt obligations.  With so much global investment interlinking, it would take more than merely what is on the board to trigger a contrary reaction.  Just keep in mind, the U.S. economy still looks relatively healthy when you consider the 120+% debt to growth ratios that exist in the current bailout nations of Europe.