Armageddon On Or After Aug. 2 Not Very Likely (Relax and Take a Deep Breath...)

Investors Business Daily ^ | 07/23/2011 | Jagadeesh Gokhale

[SeekAndFind]

EXCERPT:

If the U.S. government misses interest payments on public debt soon after Aug. 2, rating agencies will downgrade U.S. treasuries, prompting investors to dump those securities and sell dollars en masse.

Such a market reaction would increase U.S. and world interest rates, decimate investment spending and trigger an inflationary spiral as the Fed is forced to monetize U.S. debt.

But given the high likelihood of such an adverse market reaction to a debt default, would the Obama administration fail to make debt-service payments a top priority after Aug. 2?

After all, debt service constitutes only 12% of incoming federal revenues — more than sufficient to cover interest payments for months after Aug. 2.

If the administration fails to service treasury debt on Aug. 2, it would transparently constitute a premeditated and deliberate policy to hurt the U.S. economy — which would irrevocably damage the president's re-election prospects.

This means, in turn, that markets are unlikely to view the risk of a technical U.S. default on Aug. 2 and of financial Armageddon soon after Aug. 2 as high. It also means a downgrade of U.S. debt is unlikely unless the deadlock continues well beyond Aug. 2.

Investor expectations that the president and Congress will soon settle on a prudent policy course, relax the debt limit and restore the government's longstanding "full faith and credit" are also likely to be sustained through and beyond Aug. 2.

Thus, few holders of U.S. government securities are likely to alter their holdings anytime soon. This expectation is validated by continued low interest rates and spreads between long and short maturity treasury securities and those between U.S. and foreign sovereign debt securities.

[EGPWS]

Obama isn't going to let us blow through the 2nd without raising the debt ceiling.

Then the whole country would find out that nothing dramatic would happen and his political stature would be in the mud for the rest of his term.

It was the same thing here in MN when we would all die (women, children, and the elderly first) IF we didn't raise taxes but we let the government shut down.....NOTHING happened! 2 weeks later the democrat gov caved.

[Jack Hammer]

Personally, I would never put ANYTHING - either corrupt OR stupid - past President Marx.

[Gator113]

“...... constitute a premeditated and deliberate policy to hurt the U.S. economy — which would irrevocably damage the president’s re-election prospects.”

Re-election prospects???? For crying out loud!

This is like saying that if I get caught robbing a bank just before Christmas, that next Christmas I will not again be allowed to enter the bank.

IMPEACH and ARREST the country wrecking bastard.

[The Great RJ]

My wife and I met with our broker yesterday and he advised us to pull all our retirement savings out of stocks until this debt thing is settled. We did and I am very confident we will be glad we did.

[Brad from Tennessee]

The feds own approximately 650 million acres of U.S. land. Taxpayers spend billions to maintain this mostly idle property. Why not start selling it off? Some national parks are huge. The park service could cut out enclaves inside these parks and sell exclusive lots to millionaires for vacation homes. The management of these parks could also be privatized with the contractor profiting from admission and camping fees and retail outlets. Also, whenever there is a military base closing the government donates the base to local government. Why not sell the decommissioned base to the highest bidder? Then the local government can collect property taxes.

[RushingWater]

Neil Cavatu is parading person after person saying we have to do something and even had this reporter saying her Blackberry is full of Republican congressman panickly stating that something will be done. Market fear is being repeated over and over.

So the pressure seems to be on for the Republicans to cave and the Senate didn’t even allow the House bill to come up for a vote.

What I don’t understand is that raising the debt ceiling is the worse thing we could do for our credit rating. If Obama doesn’t pay up creditors, the House should immediately write up articles of impeachment.

[Norseman]

I’m sure your broker will be happy, regardless.

[Norseman]

>>Neil Cavuto is parading person after person saying we have to do something and even had this reporter saying her Blackberry is full of Republican congressman panickly stating that something will be done. Market fear is being repeated over and over.<<

I’m guessing Cavuto doesn’t know the situation and is convinced that all hell will break loose if the debt ceiling isn’t raised. I once thought that also, but no longer do. By far the best move the House can make right now is to call the President’s bluff (he did say he was bluffing, after all) and go home. After talking with their constituents, they’ll be relieved that they didn’t make any “grand bargains.”

[McGavin999]

I am so tired of this. Saying we can’t pay our bills is like saying we can’t pay our mortgage payment because we need to money to buy season tickets to the NFL games. Good grief! How dumb do they think we are?