"Suppose you were an idiot, and suppose you were a member of Congress;
but I repeat myself." ~ Mark Twain
As President-for-Life of the Creston Economics Club, I've gotten increasingly tired with the media's daily grind of reporting on the "impending" debt issue facing our fine federal government. Fortunately, for the past several weeks we have been touring Europe and thankfully been out of touch from the hourly rants of politicians, lobbyists, financial moguls and smiling media personalities regarding the ever-growing "what if" economic/social/political scenarios about the Aug 2nd drop-dead deadline for financing our government. But now we're back in the good ol' USofA. Oh well. [I've secretly contemplated securing seats on some airline flight to some fairly isolated locale just to manage my fiscal blood pressure. Maybe Cody, Wyoming; Port Moresby, Papua New Guinea; Las Palmas, Canary Is., Hobart, Tasmania; or Bridgetown, Barbados. Suggestions remain welcome.]
Despite no one's asking me, I'll share what I've gleaned so far in handy bullet-point format.
1. No one knows what's going happen when Aug 2nd comes and goes without some sort of meaningful Congressional/White House fiscal agreement. Everything we've been hearing is pure speculation, unfounded by fact - and stated to bolster someone's position not to enable a resolution.
2. The agreement will be founded on politics, not economics (see below).
3. No one's wearing a white hat. We're all responsible for our nation's fiscal imbalance. We've individually and collectively been spending beyond our means forever – hence our fiscal debt. In this sense our politicians are just like the rest of us – we don't want to admit responsibility and cut our spending to more closely match our available revenues.
4. Self-righteousness rules. We all want someone else to take the hit.
5. Our politicians have been dancing around this "issue" for a very long time - it's been caused by many factors (some of which are actually under someone's control, others are not) – meaning it hasn't been in anyone's interest to resolve it until (perhaps) the very last moment – say on Aug 2nd if we're watching the ticking clock. So, reading and listening to the media's replay of the latest goings-on is decidedly premature before Aug 2nd (see #1 above).
6. Given the continuing state of politics, it's entirely probable (I'd give it a 95% likelihood ±5%) that the political "solution" will not at all resolve the real economic imbalances underlying our government's fiscal situation. It will be temporary and inadequate. And the markets will immediately understand this (see #8, below).
7. Unsurprisingly, unreality rules on every side of the political fences so far. No one believes anyone else's position. The tribal nature of humans is being all too amply demonstrated in Washington DC and other centers of political decision-making. Compromise is as deadly as Bubonic Plague, especially for the Taliban (aka tea-party) Republicans.
8. So, what will happen? Here's my prediction, not burdened by any insiders' knowledge.
8.1. The anonymous, fiscally powerful international bond markets will ultimately exercise their influence on the world's "safest" investment – the 10-year US Treasury note – by forcing Treasury yields up, just like they have on Greek, Irish and Portuguese bonds. Remarkably, Treasury notes' yields haven't risen much so far (reflecting in my mind the bond markets' understanding that before Aug 2nd all talk about US debt issues is irrelevant – again, see #1 above). Today's 10-year Treasury notes' yield is 2.95%. How much these yields will rise after Aug 2nd is anyone's guess, but they will rise.
8.2. The federal government will begin exercising payment prioritization, in order to deal with the Treasury's inability to raise adequate funds to cover all its obligations. Who will get shafted? That's the $64 billion question. I tend to agree with others' assessments that folks who won't be getting timely payments from the federal government would include federal employees (although with the ultimate irony, not Congress people), government contractors, welfare recipients (who are always first to suffer), grants to the states, and possibly military personnel. US sovereign debt would be downgraded, other public and private bonds' values would fall, money-market and mutual funds would be adversely affected spreading the fiscal pain to many more folks. Is it time to sell short? Quite probably.
8.3. After Aug 2nd the Law of Unintended Consequences will quickly exert its commanding influence in unpredictable ways that could unveil recessionary forces (and rising unemployment) across the economy in time for the middle rounds of the 2012 election season. Wonderful.
Onward towards uncertainty…
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