What the Debt Ceiling Means to You!

By Todd Harrison  JUL 27, 2011 10:15 AM

Crosscurrents collide in our mid-week freak.

 


In 2008, I offered that the crisis would cycle through the financial, economic, and social spheres. It now appears to have infected the political spectrum as well.

As European leaders navigate the most dangerous economic juncture in the history of the Eurozone, stateside policymakers have been on a mission all their own -- to arrive at a bipartisan agreement to raise the debt ceiling.

While this topic is confusing to many Americans, it is actually quite simple: The United States has been writing checks at such a feverish pace that its coffers are running dry. Unless the legal cap that the federal government is allowed to borrow -- the debt ceiling -- is raised, our country will run out of money.

Before you react to that scary fact, please remember that the debt ceiling has been raised 74 times since 1962 -- averaging roughly once per year -- and most of the current debate is predicated on political infighting, competing agendas, and shameless self-promotion.

The government won’t default; while that possibility exists, the resulting financial fury would make Lehman Brothers look like a pimple on an elephant’s ass. No, they’ll come to an 11th hour “rescue” that appeases both parties, avoids the worst-case scenario, and perhaps even makes politicians look magnanimous for their sacrifices in the summer heat.

Unfortunately, that’s not where this story ends. In some ways, it’s where it will begin. The US will still lose its vaunted AAA rating, in my view, which is an outcome that has already been signaled by the rating agencies. The venomous political process, coupled with the structural debt dilemma, warrants such a move and that will matter for mainstream America.

How? Two words: higher rates. The consumer, many of whom are over-extended on their credit or underwater on their homes, will be forced to pay more interest on their credit cards, car loans, gas prices, and mortgages. It won’t be a sudden spike -- it will be a gradual bleed -- but those can be just as debilitating.

When an accord is reached -- and they’ll make a big deal about it when it is -- the financial markets should enjoy a relief rally despite the negative longer-term implications (slower growth).

Through a pure technical lens, that should tack on a quick 5-7% to the upside. So enjoy it when it arrives and remember not to overstay your welcome -- you always want to leave a party while everyone is having a good time.

Random Thoughts

R.P.

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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