The Road to Default: Puppy Power!

July 18, 2011
By

(This article was first published on The Dancing Economist, and kindly contributed to R-bloggers)

Although Congress can technically dilly dally until August 2nd to come up with an agreement and raise the debt ceiling- markets have anticipated the inevitable. They haven't sat back and decided to wait till August 2nd to panic- they are already in "oh shit" mode.  On this note a recent CNBC interview with David Murrin suggests that I am not alone:
A U.S. default isn't a matter of "if" but "when," David Murrin, chief investment officer at Emergent Asset Management, told CNBC. "It's inevitable that the U.S. will default—it's essentially an empire which is overextended and in decline—and that its financial system will go with it," he said.
Uncertainty about what Congress is going to do has forced investors to assume that Congress will screw it up.  Steven Hess of Moody's explains this as "event risk" and today suggested that the United States eliminate its statutory limit on government debt to reduce uncertainty among bond holders.  
"The current wide divisions between the House of Representatives and the Obama administration over the debt limit creates a high level of uncertainty and causes us to raise our assessment of event risk," Hess said.
This additional "event risk" is just one additional factor that encourages ratings agencies to downgrade the United States AAA credit rating. 
Unsurprisingly enough, we have already seen the Dow Jones fall 1.1% today. Surprisingly, Treasury yields have remained unscathed. Furthermore, there has been an increasing capital "flight to safety" as Gold hit a new high today. Investors are just chillin' and waiting for the news that will trigger the dumping of Treasuries. I have a feeling that this is the present situation because investors aren't buying Treasuries, but they're also not selling them, instead we see the flight to safer assets from stocks directly to Gold and Silver. I will be following the news as it unfolds with both ears perked ready to hear the verdict. This is the casey anthony trial for the financial markets.

Who is going to save the world? Will it be a bunch of cute puppies fighting crime and licking the face of someone in a state of post traumatic stress? Unfortunately, i don't think any amount of cute puppies will be able to cause congress to agree on a sustainable and credible debt deal in the near future.  That is why I ask who is going to save to world? If not cute puppies- then who? 
Timmy G of the U.S. treasury? Benny B of the Fed? Or will our nation just rise up like Chris Angel and produce a resolution out of thin air?

Keep shufflin'

Steven J.




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