US politicians take financial markets back to the edge again
Posted on 25 July 2011 with 5 comments from readers
The battle royal between the Republicans and Democrats over the extension of the US debt ceiling above $14.3 trillion, or a historic 100 per cent of GDP, reaches its conclusion this week.
Markets will fall as the debate heats up and brinksmanship takes over. But equally predictable is the rally when the politicians make a deal, rather like the eurozone crisis of the past few weeks and months.
High stakes
However, what is at stake is far more than the need to secure enough funds to stop the US federal government running out of money and a debt default on August 2nd.
A government debt of more than 100 per cent is a classic alarm signal. It is only right that this is debated in a public forum and the issues aired now.
For above 100 per cent a country’s bond market will begin to raise interest rates to slow debt accumulation down. It does so for good reason.
The debt is now so big that servicing the interest starts to become impossible without borrowing even more. So borrowing is needed to finance borrowing and the debt starts to balloon.
As the debt inflates so does the money supply and consumer price inflation and the unit of currency devalues. That is why gold and silver priced in US dollars are jumping in price and gold is at another all-time high.
Importantly for investors there is no easy solution for politicians to vote a solution. Raising the debt ceiling gets us past August 2nd but it achieves little else.
1970s deja vu
The inevitable denouement remains. To ArabianMoney it looks like becoming a more intense version of the stagflation and dollar weakness of the 1970s.
You therefore have to position your asset allocation to profit from this and not in such a way as to lose from it as most investment classes that performed well in the past will undoubtedly do.
For legal reasons we cannot give specific investment advice on this website. We keep that for our monthly investment newsletter, the only independently produced one from Arabia, and not surprisingly the subscription levels are rising as this crisis develops (subscribe here).
5 Comments posted by readers:
I went to the NYT web site for Nov. 13 2010. They have a do-it-yourself budget balancing experiment that lets you try to balance the budget. It is easy to do IF you are willing to raise taxes just a little, and cut the Federal budget a little. I didn’t starve granny, or let any sick poor people die on the street, and I generated a huge surplus.
David Faber did a CNBC special about 2 years ago called ‘Untold Wealth: The Rise of the Super Rich’. It detailed how incredibly wealthy some people have become in the USA since the Reagan tax cuts, and hijacking of the boards of directors by the new business elite to obtain multi-million dollar annual salaries. It has been removed from the list on the CNBC USA web site !!!
It is the ONLY one missing. I guess the fat cats didn’t want it to get on YouTube at the same time Congress is discussing raising the age for Medicare to 67. It wouldn’t look too good to have some US billionaire casually discussing paying $40,000 to get a single tire changed on his $2,300,000 sports car, one of 20 in his private 2-story rare auto museum, while granny had to move onto the kid’s basement after going bankrupt from medical bills.
Obama has proven that he is not genuinely interested in REAL budget cuts. Go here to read a fascinating commentary on this subject by the Wall St. Journal:
http://online.wsj.com/article/SB10001424053111903999904576465843244525786.html?mod=WSJ_Opinion_LEADTop
And go here to read Harry Reid’s “plan”, which amounts to practically zero budget cuts:
http://www.zerohedge.com/news/and-kicker-reids-proposed-deficit-cutting-plan
It’s Time for the Financial Markets to Speak:
Perhaps by Wednesday of this week, the markets will start to raise their voices; . . . like shaving a few hundred points off the S&P. Then, perhaps, these worthless politicians will get the message.
days of easy answers are longgg behind us…..and we’ve also running out of the days of good answers…..increasingly there are sometimes even no answers.
the propensity of anyone to buck up and take a cut in anything is tempered by the excesses of others expecting to be privileged (public service unions living in dreamland?)…..everyone expects to be in a special protected group…..(head lifeguard on L.A. beach makes .5mil$/yr.—-fact)
while TARP let the TBTF bankers n wall street continue on their money party, if you taxed the richest 5% of the people at 100% you barely put a dent in the deficit…..there are just not enough of them.
as long as it takes big money to run campaigns politicians will be owned by someone.
If the markets do shave off a few 100 points, it may not be such a bad thing!
Just a more accurate indicator of the serious structural problems that plague the economy and are currently being ignored due to the ‘gung ho’ attitude of Wall Street
The US FED Gave Away over $16 Trillion:
I find it absolutely fascinating that the US GAO report (which was issued on Friday, 22 July 2011) revealed that the FED printed over $16 trillion, gave approx. half of that to 4 US financial institutions, and the other half to banks overseas . . . yet the news media is not publishing any of this!
Here are two important links that shed further light on this topic:
1. ZeroHedge: Ahhh, yes, we can always rely on ZH to reveal what the major news media are told not to reveal:
http://www.zerohedge.com/news/bill-buckler-puts-things-back-perspective-total-us-15-trillion-market-capitalization-fed-provid
2. The Daily Bell: A fascinating read here; they expose why there is virtually no news coverage of this topic:
http://www.thedailybell.com/2729/GAO-Fed-Issued-US16-Trillion-During-2008-Crisis