Below is a piece I wrote on July 15th. Unfortunately it is playing out as predicted. The S&P may or may not have used bad math to downgrade the U.S. credit rating but their stated reasoning (unstable US domestic politics prohibiting the ability of the US gov to secure the long term financial security of the US… and who’s fault is that?) is exactly what I would expect to hear.
“Follow the $$$$.
Who wins if we default on the national debt? Even for a month?
Foreign and American financial institutions.
Wait. How can that be? Won’t they be hurt if we stop servicing our debt? Nope, check their balance sheets (hint: cash and other fungibles) now at historical highs .
U.S. Defaults? Pass the saki.
How will this work? Well, we could go into default but the financial world will not end… In fact, there may never have been a better time to invest in financial stocks(not withstanding BOA, a sloppy sister embarrassing her more refined siblings.) The government will continue to pay on the debt and fund the armed forces and other essential services to keep civil society intact and money flowing to big banks and corporations.
But that scenario is not going to happen. When agreement is reached on the debt ceiling ,which it will be shortly, interest rates will eventually rise dramatically because we are “no longer a good credit risk.”
In fact we will be just as good a credit risk as we were before this manufactured crises but our creditors will sing in unison that this is not the case. The price of borrowing new money and interest on old debts will rise. It is another frame in Norquist’s dream to reduce the U.S. government to the size where it ” can be dragged it into the bathroom and drowned in the bathtub” by increasing the amount of money the government must spend on debt servicing. Discretionary spending for the common weal will sink to new lows and our creditors’ coffers will swell.
For our creditors, it is not about the new debt– it is about the existing debt. Do you think the U.S. debt is in fixed long term instruments? Get real. The majority resets frequently which means it is like the whole country has a variable rate mortgage which will rise every month, whether we default or not.
Indeed, I suspect the goal has already been achieved. The U.S. is a “risky bet.”
(Faq: At the end of March 2011, the publicly marketable part of the national debt had nearly doubled from August 2008, to $9.11trillion. Of that, $5.8trillion was in Treasury notes which mature in terms of 2 to 10 years, $1.7trillion was in Treasury bills, $931.5billion was in long-term Treasury bonds, and $640.7billion was in TIPS.)
Who, what, are these people that engineer the strangulation of our government to serve foreign interests and internal enemies of the common good?
Around the corner: more inflation, not right away, certainly after 11/6/12. The masters of the universe are not fools and interest rates will remain artificially low during another year of no’s from Congress and then when “confidence has been restored,” with the election of a Republican president, all bets are off as the engines of this economy are throttled up and inflation becomes a useful tool again. That’s another blog. Don’t get me wrong, the debt we are incurring now is necessary, unlike the trillions Bush ran up. But the price we will pay is not. The price we will pay for fixing Bush’s mess will be inflated interest rates, and higher taxes for the middle class to service the debt… taxes which will be blamed on the Democrats because after all, aren’t the Democrats responsible for all this debt?
What else? This is a long domino train. Didn’t start here. Won’t end here.”
Post script. An astute friend commented “the problem is, they can’t raise taxes… so the real future is destruction of Medicare and social security…”
I’m not ready to pick the winners in that fight yet but I do think interest rates are going to rise and that was what the stock market was reacting to last week, but that will stabilize as cooler heads prevail. Profits are at all time highs. The top 50 corporations alone are sitting on almost 2 trillion $ in liquid assets and could care less about borrowing rates. World markets are shaky, but the U.S.? Solid.