Wednesday, July 27, 2011

All Just A Little Bit of History Repeating

It's all just a little bit of history repeating...........

We tend to have short historical memory. Ronald Reagan signed bills to raise the debt ceiling 18 times. George W. Bush did it at least 7 times. Typically, doing so is so routine -- and such an obvious need for the economy -- that the bill to do so is one page. And now we have this manufactured crisis.

Let's review: If the United States of America defaults on its loans or can't pay for all the things Congress has already approved for spending, then the world's investors will no longer see the U.S.A. as safe an investment as it has always been. Remember the 10-Year Treasury Bond is the gold standard of safe investments (see prior posts).

If that happens, then investors will require a higher interest rate for the 10-Year Treasury. If that happens, because the 10-Year Treasury sets the floor for almost all other interest rates, we will see a rise in interest rates that businesses use (big and small) to finance their businesses and therefore will incur a manufactured "tax" on their loan interests. Consumers will see a rise in interest rates in credit card rates, car loan rates, and most devastating of all, mortgage rates. If you don't like tax hikes, you will abhor this.

Still, there is this manufactured crisis that is threatening to become all too real right now, forced by our politicians over something that should be routine. Should there be a debate and resolution about sustainable financing of the government? Of course. Should it be at the threat of the nation honoring it's debt obligations? Oh hell no.

The time for the honest debate has now passed. We can continue it, but we can't let the United States of America default on its debt obligations. The market plunged 200 points today in the Dow. It may be occurring to "serious smart" money that the adults in Washington DC are actually, possibly, not in charge.

Still, though... this too shall pass. We won WWII and our economy rebounded. We fought the USSR and won. We dealt with 911 and $2+ Trillion in historical tax cuts while fighting 2 simultaneous, rather ill-advised wars. We took a budget surplus in 2000 and turned it into a stupendous debt even before the economic crisis happened. Reagan gave us our first trillion dollar debt. The debt when George W. Bush took office was "only" $5.6 Trillion. Can this nation have been through so much, and done so much in the past 10 years, that we can't set the course straight again? I doubt it. And so do the world's investors who are help fueling our frustratingly slow recovery, but still a recovery. Mortgages and the 10-Year are still historically low today, even with the Dow 400 points down this week.

How patient will the world's investors be, however, if our politicians continue not to be responsible with our nation's economy? Will this become another historical inflection point? I hope not. I hope the adults really are in charge. We'll find out what the world's financiers, who have our economic future in their hands by the decisions they make based on risk factors only, believe as they continue to watch the absurdities taking place in Washington DC. Let's hope the adults take the wheel soon. I predict they will.