“You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.” Rahm Emanuel
In last week’s contrived crisis, we saw about 18% of the “nonessential parts” (whatever that is) of the federal government shut down. And the markets really took this about as seriously as the rest of the American people.
FINANCIAL ARMAGEDDON
This week, we are faced with financial Armageddon as the dark specter of default looms over the U.S. government. Unless our ever vigilant congress raises our national debt ceiling from 14 trillion to something higher, we face bond default, payroll disruptions, retirees not receiving their social security checks, human sacrifice, dogs and cats living together and mass hysteria.
As we have only had a federal government surplus a grand total of nine times since 1940 it’s obvious most in our government prefer a gradually and ever expanding debt to either the more difficult task of living on the income they receive or default. What shape would your household finances be in if you only spent less than you brought in 9 times in the past 73 years. Yeah, probably not too good. But, so long as Amex keeps upping your limit, you’re in good shape.
How seriously can the markets really take the risk of default when the 2013 estimated tax revenue is 2,712,000,000,000? Give or take a few hundred billion. So, only in the world of government fear mongering for political power do secured bondholders hold a less preferential position than spending over a hundred million dollars to subsidize farmers to not plant crops, or spending 25 billion in maintaining vacant or unused federal buildings.
Our federal government hardly has a revenue problem. They have spending and revenue allocation problems.
The only way we default on our loan debts is if the guy tasked with sending out checks decides that paying an extra $146 million annually for flight upgrades for government workers is more important than paying the mortgage payment of our federal government.
So, it will be interesting to see how seriously the markets take this threat of not raising the debt ceiling. If history is any judge, the two sides will likely come together, make some concessions, kick the can down the road a few more months and we will continue to favor our gradual slide to insolvency over the rapid drop-off we are currently faced with.
CURRENCIES
In the world of currencies, I’m not sure what will happen. Considering the euro has been basically range bound for the past four weeks, I’m not the only one. I’ve heard arguments on both sides. The trader must weigh the impact of raising the debt ceiling (read, more supply of dollars in the market) as a supply / demand issue over the perceived dollar security of borrowing even more money to pay our bills. Neither argument bodes well for long-term dollar security, but either option will likely give the astute trader opportunity to exploit market volatility. Technically, price seems the only reason to buy the dollar. And price alone is generally a lousy reason to buy anything.
