Commentary: The fuse has been lit on a major explosive device - and the audience is holding their collective breath hoping the good guys find a way to disarm the device before it goes off any creates all kinds of mayhem.
Just like the plot line from an old movie - the clock is ticking on congressional efforts to reach an agreement on raising the national debt ceiling before the United States finds itself unable to pay its service providers. The principal and interest owed to our creditors will undoubtedly be made - but without a debt limit increase - payments to government employees and funding for all manner of government service will either be late - or missed all together.
Credit market participants continue to expect a dramatic "last-second-save" by Washington - with both political parties crowing about their success in diverting financial catastrophe for the nation. The probability is growing that meaningful and sustainable deficit reduction plans will be largely sacrificed in order to avoid a major national credit default.
The "so what" factor here is worth noting.
Without major deficit spending reform we will find ourselves as a nation asking our creditors to lend us more money - so we make next month's payment to them on the debt we already owe. Just because we have maxed out our national credit cards - spending more money than we make - is certainly no reason for us not to get an approval to increase our credit limit. And it is certainly no reason for our creditors to quit lending money to us at preferential rates. Right?
Perhaps such rationale is justifiable in the mind of those desperately trying to avoid the political heat implementing meaningful deficit spending reduction plans could/will generate during the upcoming 2012 campaign season. But for global investors in our sovereign debt -- the risk of an ultimate credit default by the United States will grow at an uncomfortable pace - and as that risk grows - the trend trajectory of interest rates on everything from Treasury debt obligations to mortgages will surely rise as well.
Just because the credit ceiling is raised does not mean that the bomb has been successful defused - the fuse will just not be burning quite as fast as it is right now. Here is why. Should the United States loose its coveted AAA credit rating by way of an unthinkable credit default - capital from around the globe will almost surely still flow into dollar denominated assets like Treasury debt obligations and mortgage-backed securities for a period weeks or months following our debt default. Realistically, where else is this capital going to go? We are at least one of the top four prettiest girls - and the argument could easily be made that we are still the prettiest girl - at the global credit markets dance.
Be patient - be disciplined - and play it by the numbers.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
