Monday, July 25, 2011

Where You Gonna Go?

8 days. That’s how long is left for these silly politicians to do their jobs and raise the debt ceiling. By the way, the debt ceiling, as a concept, is a completely ridiculous and stupid invention, meant only for political dances like the one we find ourselves in now. Neither side wants to concede its position, and ideology may get the better of common sense. And no matter how many different permutations of the same compromise is offered, until one party makes a radical concession, they’re going to fail.

The most recent proposal put forth by the Republicans calls for the ceiling to be raised in two stages: $1,200bn now and then another vote during the election year. This is classic political behavior, and instead of solving the issue, merely delays it (read my last post on Greece anyone?). Of course, if they were going to discuss the debt ceiling between now and then, maybe progress could be made. But they won’t, because they’ll turn their heads to the election cycle. Both parties have forgotten microeconomic 101: there are two sides to saving, costs and revenue. While the Democrats love to increase revenue with taxes, and the Republicans are looking to cut costs, neither side seems to realize that, numerically, they can get to the same place by doing a bit of each. And anyone who claims they won’t do something simply based on principle, without any quantitative argument, is, quite frankly, a moron.

Regardless, here we are, so what’s the worst that could happen? Well, we could default. Or maybe we could avoid default (which we can), but simply refuse to pay the bills to the FBI or Coast Guard or some other similar entity. I say, between those options, default is better. How do you think life without police would be? It’s unfathomable to most people, and those police officers, let’s not forget, are without paychecks now. So, we must ask, what will default trigger? The end of U.S. economic dominance? Riots? I do not believe the fall-out would be as dire as some people would have you believe. Are investor’s going to stuff money in their mattresses? If we do default and begin restructuring, there will still be ample supply of inflows and purchases of Treasuries. With everything else going on in Europe, the dollar is still the world’s main safe haven.

I’m going to turn around and offer a contradiction to myself, right now. The markets may be hinting at where investors would go, if default occurred. The Swiss franc and Japanese yen climbed 1.7% and 0.3% against the dollar today, respectively. Naturally, with the Greece crisis and all, the euro has its own problems. Gold also gained 0.9% today, and would also likely see more gains if the country defaulted. So, while I said investor confidence would not be lost in the U.S., it seems it certainly could be rattled.

Of course, things are not helped when that ever-so-nasty self-fulfilling prophesy lurks around the corner. What am I talking about? The IMF recently gave its opinion on our debt situation, and, in so many words, painted a picture of something of a doomsday scenario. And while it is difficult to bridge the line between sound research and policy making, perhaps the economists at the institution might have remembered that their words can inspire investors to actions. And in this case, those actions would probably make the economists’ nightmares come true. What could have been a little shifting of bond holders in their seats and a polite cough or two from irritated investors, could now turn into a screaming crowd running out of the theater…

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