Update: With some accounting magic, Treasury Secretary Tim Geithner reset the new Doomsday date to Aug. 2, 2011. Gives us a bit more time to pontificate.
Armageddon or Life as usual?
These are the cardinal extremes we hear will happen if Congress does not raise the debt ceiling by May 16th.
Will failing to pay the principal and interest on our loans create a death spiral for the U.S.? Some highly regarded economists seem to think so. I agree. For several decades the U.S. Treasury has issued a neat little financial vehicle called a savings bond. This has been recognized internationally as the safest investment in the world. When wars break out, natural disasters occur and political unrest seems to erode the stability of the local currency. The U.S. Treasury will provide an investment that is “backed by the full faith and credit of the United States government.”
That sounds pretty great… Until it doesn’t.
Politicians are now playing chicken with the entire financial health of our country. It is absurd. I understand the ideologies at play and the mandate that some Tea Party Republicans believe they have from their constituency.
This, my friends, is not that.
The mandate was to achieve fiscal responsibility, not to plunge our nation into a double-dip recession or even a depression.
The specific results of the U.S. Government failing to fulfill it’s financial obligations is mind-numbing. I ‘ll try to paint a scenario:
May 16th hits with no action on raising the debt ceiling. So what?
First, investors will start to get cold feet and ‘quietly’ move away from Treasury bonds, redeeming them for cash. This starts to accelerate. Worldwide T-note dumping occurs.
Social Security checks stop getting mailed out. AARP reps on Fox and CNN are self appointed harbingers of the end of the world for seniors. Widespread Panic. Stocks plummet, Corporations hand out massive amounts of pink slips. The Great Depression: Part Deux is in full swing.
Recovery is not certain or swift. In fact a decade could pass before things begin to stabilize. Even then, The next time a US program wants to raise money it will have to pay higher interest to do so. The U.S. Dollar, once the worlds reserve currency, now sits alongside the Zimbabwean Dollar as a curiuos relic of the past. Back when a U.S.A backed financial instrument could always be counted on.
The creditworthiness of the U.S. should never be some political poker chip that hack politicians can use to barter with. This is the bedrock of our entire society. Social Security, Medicare and many thousands of institutions that have placed their ‘safe’ money in U.S. treasuries would lose that faith and pull out. It is a confidence game.
Imagine that you have $1,000 dollars in U.S. Dollars. You are to be cryogenically frozen in about a week and revived in 30 years. (Think Han Solo in Carbonite).Here is your question:
Where would you invest your $1,000 ?
An individual stock? Apple? GM?
An index Mutual Fund? Vanguard S&P ? Fidelity ?
Real Estate? (Remember, you won’t be around for 30 years to unclog drains or find trustworthy tenants)
Would you buy silver or gold coins and bury them somewhere? (hope you remember where you put the map)
Would you bet on an emerging market? Asia? Latin America?
Now the big question: Would you buy U.S. Savings bonds or Treasuries?
What would you do?