America’s impending “debt default” makes for great headlines…
But it’ll never happen.
The dangerous game of chicken between the Democrats and Republicans being played up by the media is nothing more than a way to boost ratings. And it’ll probably work, thanks to the knuckleheads in Washington.
Remember the drama that took place in the hours before the bailout package was meant to pass… and the hours that followed when it didn’t pass… and then when it passed shortly after that?
While this political theater is nothing new, the most recent act may trigger some interesting buying opportunities if the debt ceiling issue makes it to the August 2 deadline.
In a nutshell, here’s what you need to know about our “impending” debt default…
Reach for the Ceiling
The United States Congress must pass a resolution to allow for the raising of the debt ceiling. This means Congress must authorize the printing of more money so we can pay interest and principal on the sovereign debt issued by the United States. And this sovereign debt is the most highly rated debt in the world because the United States has always settled with creditors.
This time, however, Republicans oppose raising the debt ceiling unless there are spending cuts attached aimed at reducing America’s overall debt. The sticking point here is that Democrats and the President want both spending cuts and tax increases (or reversion).
So there’s an impasse. And if they don’t resolve this crisis by August 2, then the United States will technically default on its debt. If that were to happen, the market would likely not open on August 3.
If you’re worried about this – sell now!
But it won’t happen. Here’s why…
Look to the Constitution
This isn’t a game of chicken, where one party must concede. While it’s portrayed as such – with Republicans holding the upper hand – the reality is far from it.
The framers of the constitution, and those who followed, made sure that these chicken games were left for the farm.
The 14th Amendment to the U.S. Constitution says this in Section 4:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
Basically, this clause is a green light for the President to force Congress to fulfill the debt obligations of the United States, whether it likes it or not… and Republicans are very aware of this.
Panic is Minimal
One of the key forces at work here is credit default swaps. These financial instruments are bought or sold as ways of insuring against default. They exist for all types of instruments, including sovereign debt.
For example, when Greece started to go down the path of no return, the cost of insuring its sovereign debt skyrocketed – as it should have. And the same is now happening to Portugal’s debt.
But despite being just three weeks from financial “Armageddon,” the cost for insuring U.S. debt is next to nothing. Essentially the credit default swap market is saying that a default isn’t in the cards – mainly because it isn’t.
The easy way out of this would be to sign off on the Republican deal. But that would make Obama a lame duck for the rest of his term. The Republicans, if they really held the upper hand, would have stopped negotiating a long time ago. But, they’re still negotiating…
I wonder why?
The truth is, the President holds the power and a default isn’t in the cards. So don’t believe any media hype and don’t expect to see a shutdown on August 3.
Ahead of the tape,