The DC Budget/Debt Ceiling Drama is Reaching a Crescendo

10/7/2013 Portland, Oregon – Pop in your mints…

The current scenario in Congress which has managed to entangle the Federal Budget, the Debt Ceiling, and Obamacare in the same line of debate is quickly reaching a crescendo as the rhetoric in Washington has degenerated into personal attacks and accusations that the other side is unwilling to compromise.

We recently saw reports that a number of Congressmen reeked of alcohol as they exited the chambers the night the Government shut down.  Apparently the only thing worse than the pressure of public office is these days is having to face it sober.

As we’ve said before, this type of stalemate in terms of budget matters is absolutely normal and to be expected of technically bankrupt entities.  As the US Government is the largest bankrupt entity on the planet, it should come as no surprise that its dramas will dominate the airwaves until they appear to be resolved.

We have been here before, you can read our commentary back when all of this latest round of bickering began back in 2011:

US Debt Ceiling Vote to Ignite Armageddon in Bond Markets? Key Indicators all Point to Inflation

This time, as both sides appear to be playing a dangerous game of chicken, the dire warnings of what will happen should the government default appear to be reaching a deafening crescendo.  The Chinese and Japanese governments, both large holders of US Treasury paper, are both pressuring Washington for some sort of assurance on their “Investments.”

US Financial Executives, who find themselves in the shoes of the Chinese, albeit on a smaller scale, are also beginning to sweat.  In a recent survey on the perceived effects of the debt ceiling breach, the Association for Financial Professionals summarized their findings in this way:

“Financial executives see dire consequences to prolonged political theater in Washington and a potential U.S. government default, according to a survey released today by the Association for Financial Professionals (AFP).

On October 3-4, AFP surveyed financial executives in the corporate treasury and finance departments of a broad range of U.S. companies across many industries, receiving 964 responses. The survey found that in the near term, finance executives believe political wrangling in Washington will lead to reduced demand for goods and services and that a failure to raise the debt ceiling in time will result in reduced capital expenditures and reduced hiring or layoffs at many companies.

But the damage goes beyond just short-term consequences. Forty percent of organizations report that they are holding back on making growth-oriented investments in the U.S. because they are having difficulty evaluating U.S. investments, due to the recurring battles over budgets and debt limits.”

As for effects on short-term investment preferences, the report goes on to state:

“A default would make U.S. Treasury securities, an investment vehicle used in many companies’ short-term investment portfolios, far less attractive. The survey found that one-sixth of U.S. organizations currently holding U.S. Treasury securities would shift out most or all of those investments if the debt ceiling isn’t raised in time. Another 36 percent of organizations would hold onto their current holdings of Treasuries, but would not purchase these securities going forward.

Meanwhile, half of the respondents say that a government default would harm their organization’s access to, and raise their cost of, capital. An increase in the cost of bank credit and higher cost of debt financing were each cited as possible outcomes by 27 percent of financial professionals.”

Scary stuff, right?  A default would cause a nearly instantaneous shift in short-term investment preferences for almost anyone holding US Treasuries.  You can read the entire horror story in the report via the following link:  AFP Survey: The Federal Budget and Debt Limit.

Joe Weisenthal over at the Business Insider presents a Goldman Sachs chart which refutes the argument floated by some that the US Treasury could continue to pay interest on its debts once it hits the debt ceiling.

Treasury Payments

It appears that once Halloween passes and the Federal Employees and Social Security recipients come calling on November 1, the well will be dry.

The well has been dry for some time now, and while it makes for great theater, it is difficult to see why it is in the interest of the government and its direct dependents to let it play out.  If it does, it can only mean that a new monetary system will be imposed, for the Mushroom Shaped Dollar Debt Sponge will have been squeezed.

However, should the US default on its debt, we reiterate our position that it “matters not,” for while the US Government and its dependents will be in a world of hurt, there will be a flood of new money available to private enterprise.  For, contrary to popular belief, Federal spending acts as a damper on the Federal Reserve’s loose money policies, and a US default may represent the ultimate in monetary stimulus, if not true economic growth.

It would be a wild and rapid adjustment but, while the numbers of those who depend directly on the US Government have risen steeply in recent years, the increasingly interconnected US and global economies are exponentially larger and the US, sans its government, is in an extremely strong competitive position both demographically and geographically.

A default may be just what the country needs to shake itself free of its economic doldrums.

So relax and choose your Halloween costumes wisely this year, as it could be dangerous to step out as your favorite politician, if indeed you still have one.

Stay tuned and Trust Jesus!

Stay Fresh!

David Mint


Key Indicators for October 7, 2013

Copper Price per Lb: $3.28
Oil Price per Barrel:  $103.03
Corn Price per Bushel:  $4.49
10 Yr US Treasury Bond:  2.63%
Mt Gox Bitcoin price in US:  $137.00
Gold Price Per Ounce:  $1,322
MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  7.3%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  14,936
M1 Monetary Base:  $2,556,500,000,000
M2 Monetary Base:  $10,726,300,000,000