Total Pageviews

Monday, July 11, 2011

Debt Ceiling Idiocy

Look, I know there's tremendous amount of political bluster out there regarding this debt ceiling. I know the Democrats are claiming the world will end if it's not raised, and the Republicans are claiming that's absurd, nothing will happen at all.

It's like they're all watching a Hollywood movie and betting on whether or not the dirty bomb will be detonated or whether Batman and James Bond will dismantle it in time.

Here are the cold hard facts:

There's about $500 Billion ($474 Billion) in Treasuries that will come due next month. And every month. The Treasury Dept, will roll these bonds over, take the new proceeds to pay off the old ones plus interest. That's how it works. Every damned month, that's what we owe to the world, on top of what we need to borrow to keep the government running.

It all runs fine, for now, as long as there are buyers of the rolled over debt. And then you have to add in the "new debt" that has to financed.

Here's the thing: the auctions have been under-subscribed lately. And that's with the Fed being openly involved as a buyer of last resort - courtesy of QE2.

Now, if we don't raise the debt ceiling it means that A) it's not clear we are guaranteeing that we will pay future interest on this debt. B) It's not clear the Fed can legally step in to buy the debt if others fail to do so. C) The debt stands in real danger of being Downgraded by S and P as they've said that is what they will do.

And so D) If The Chinese then don't show up with their truck to load it up with Treasuries, then there will be a default!

And E) That means that the world's supposedly safest investment is not safe at all. That means there will be a massive repricing of risk.

What happens then is anybody's guess. It hasn't happened in hundreds of years, so nobody knows.

This is not speculation. This has nothing to do with dirty bombs, secret agents or blowhard pundits sticking their fingers up their butts.

But I'll tell you what, if it does happen I wouldn't want to be long anything at all. Except gold - over time.

No comments:

Post a Comment