The Politician’s keep talking about Obama’s August 2nd deadline for a debt ceiling deal. They warn of Debt default and speak of the uncertainties of Social Security and Military checks going out. All three of these lines of reasoning are incorrect.
Default on Debt: To default on it’s debt the US would have to not “not pay” its creditors. Since the US government is borrowing about 42% of its monthly expenses it stands to reason that the other 58% is available cash flow. Therefore the money to pay the debt will be there. As for Social Security there is $2.1 trillion in short term securites that can be sold to fund the checks. So there are no immeadiate problems with these checks going out. Military checks can easily be funded through general cash flow-which will be over $700 billion for July.
All the political talk about default is simply not neccessary or inevitable. A Government shutdown would take place. The US government could meet its emergency and critical needs (unless Obama decides not to do this). However, it would throw most government programs on the table for some kind of cut. This is something the leadership of neither party wants to happen for political reasons. Yet this may be the only scenario that reigns in government spending.
As for the rating agencies-the big ones are compromised. The average retail investor follows the most recent trends on CNBC for his ideas.This is why small investors usually loose in the stock market-they are late to the game by the time they hear of something.The same is true with rating agencies. Many sell their ratings to the company’s for their corporate debt issues and see strength in the “hot” sector of the momemt. Which is not surprising since that’s where they are making their money. These agencies are now starting to jump onto the mainstream media bandwagan on how good more debt would be for the country.. Don’t buy this BS at all. As a rating agency you want financial strength and solvency. A government shutdown might cause some disruption, but bringing a serious axe to the National Debt would make the US more financially solvent not less. This happens to corporations all the time. As they extinguise debt their credit rating goes up. It never goes up as they increase borrowing when they are already highly levered.
There you have it …all the talk of Debt, Armageddon and Grandma’s disappearing Social Security check is bunk.
The takeaway is that a Government shutdown might be the only thing that keeps the US credit rating from deteriorating.