Quantum Pranx


Debt downgrade, not default, is the problem

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by Greg Hunter’s USAWatchdog.com 
Posted July 27, 2011

Today is August 1st. Further developments have come forth since this article was written, but it is still relevant to this unfolding drama – or is it a non-drama, as some have opined? – Aurick

WATCHING THE DEBT NEGOTIATIONS IS LIKE WATCHING TWO STUBBORN PEOPLE headed over a waterfall. Both are too blockheaded to steer the boat towards land on the left or the right. So, both go over the edge and will see how long the other can hold his breath. Both, of course, drown in this story, right along with the rest of the country. Yesterday, Speaker Boehner said he wanted to call the President’s bluff and not give him a “blank check.”  The President, on the other hand, has said (many times) he’s going to veto any plan that doesn’t raise the debt ceiling past the 2012  presidential election.

I know many think there is going to be a last minute deal before the August 2nd deadline, but I just don’t see it.  If the Republican bill from the House makes it past the Democrat-controlled Senate and there is only an increase in the debt ceiling to make it for 6 months or so—veto here we come.  Or maybe, there is no bill that can get through Congress, and nothing even makes it to the President’s desk by the August 2nd deadline.

I eventually see a debt deal getting done, but not until after the August 2nd.  That’s when the Treasury says it will exhaust its borrowing limit.  In this scenario, both parties hope the other side will take it on the chin and be hurt worse in the eyes of voters. I don’t know who will come out on top if this happens, but big time damage to the U.S. economy will be done.  Forget about default on the U.S. Treasury debt. That is simply not going to happen, at least not anytime soon.  America has the money to pay the interest on its Treasuries.  It is the credit rating of the United States that will take a beating.

In the latest report from Shadowstats.com, economist John Williams said, “If I were to script a scenario as to how the United States quickly could debase the U.S. dollar with maximum impact, impairing the dollar’s reserve status and dwindling global credibility, and accelerating the movement towards a U.S. hyperinflation, it would be extremely difficult to come up with a more destructive course of action than what already is taking place in Washington, D.C.  The chances of a U.S. debt default remain nil, but risk of a U.S. sovereign credit rating downgrade—though small—is increasing. . .”   

If the debt of the United States is downgraded, other debt will also be downgraded. As credit ratings go down, interest rates do the opposite. U.S. consumers would start paying more for things like credit cards, mortgages and car loans. Hundreds of municipalities would also pay higher borrowing costs for their debt. These are just a few of the interest rate wild cards.  This would put a huge drag on an economy that is already on the skids.  The dollar would also take a pounding because nervous investors would start to dump dollars and Treasuries.

The Shadowstats.com report goes on to say, “The administration claims the U.S. will default if the debt ceiling is not raised by August 2nd.  There are those who suggest there is more time beyond that, if only the government selectively pays its bills, giving priority to interest and debt payments.  With other government obligations not paid as due, though, that circumstance likely would trigger the rating downgrades and intensify dollar dumping and abandonment.”   

Paul Craig Roberts, former Assistant Treasury Secretary in the Reagan Administration, agrees with the Shadowstat.com analysis.  In a recent essay, Roberts said, “The US dollar could plummet in exchange value and lose its role as world reserve currency. The US would no longer be able to pay its oil bill in its own currency, and as its balance of payments is heavily in the red, the US has no foreign currencies with which to pay its oil import bill. Or its manufactured goods import bill, or any other bill. We are talking about a crisis beyond anything the world has ever seen. Does anyone think that President Obama is going to just sit there while the power of the US collapses? He doesn’t have to do so. There are presidential directives and executive orders in place, put there by George W. Bush himself, that President Obama can invoke to declare a national emergency, suspend the debt ceiling limit, and continue to issue Treasury debt. This is exactly what would happen.  The consequences would be that the power of the purse would transfer from Congress to the President.” (Click here for the complete Paul Craig Roberts post.)

I think, by now, both parties are calculating how bad the fallout will be and which party gets the blame if a debt ceiling deal is not done by the August 2nd deadline.  Could the Republicans really not want the economy to get much better until after the 2012 election?  On the other hand, maybe the Democrats know the economy stinks and figure it won’t get much better anyway come election time.   Might the President veto a bill he hates and blame a plunging economy and government shutdown on the Republicans?  Bill Clinton did a similar thing in the mid-90’s, remember?  Although, the stakes this time around are exponentially higher.

It wouldn’t be hard to sell a “national emergency” to the public if the stock market sold off a couple of thousand points and gasoline prices went to 8 bucks a gallon—would it?   Whether or not you like Barack Obama, never underestimate the power of the President.  Wouldn’t it be strange if a debt deal finally got done on August 15, 201l?  That’ll be exactly 40 years to the day President Richard Nixon took America off the gold standard.


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