Economic Issues Remain in Wake of Debt Resolution
The 11th hour agreement by the US government is unfortunately not where the story ends.
What a Debt Downgrade Means for You
In 2008, I offered that the crisis would cycle through the financial, economic, and social spheres and 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 were on a mission all their own -- to arrive at a bipartisan agreement to raise the debt ceiling. (See: The Most Important Juncture in History)
While that topic confused many Americans, it is actually quite simple: The United States has been writing checks at such a feverish pace that its coffers ran dry. Unless the legal cap that the federal government is allowed to borrow -- the debt ceiling -- was raised, our country would have 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 wouldn’t default; the resulting financial fury would have made Lehman Brothers look like a pimple on an elephant’s ass. No, they arrived at an 11th hour rescue that appeased both parties, avoided the worst-case scenario, and even made 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 begins. The US will still lose its vaunted AAA rating, in my view, which is an outcome already signaled by the rating agencies. The venomous political process, coupled with the structural debt dilemma, warrants such a move and the ramifications will manifest 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.
Conventional wisdom dictates that the market will enjoy a relief rally on the heels of the debt ceiling agreement despite the negative longer-term implications (slower growth). That’s what everyone is banking on, for obvious reasons; the alternative is pretty scary indeed. (See: Will The Fed’s Last Bullet be Pointed Inward?)
Should that scenario unfold -- and I sense the bulls give it a try as long as Europe holds together -- enjoy it for what it’s worth and remember not to overstay your welcome. You always want to leave a party while everyone else is having a good time.
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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 firstname.lastname@example.org.
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