Investment Contrarians

U.S. Default to Derail the Global Economic Recovery?

By for Investment Contrarians |

Global Economic RecoveryIt’s absolutely astounding to me how negotiations among politicians regarding the funding issue for the U.S. only pick up when the deadline is nearing—or is already here. The funding issue isn’t like that college paper you crammed into a couple sleepless days to meet the deadline; we’re talking about the future of a country here.

I mean, why did the House wait until the last minute to debate the funding issue when it was aware of this a long time ago? Heck, the funding issue could have been resolved by now and we could be onto the debt ceiling limit debate; we still have that to discuss before the October 17 debt ceiling deadline.

What do politicians do all day? If they ran a company, the business would likely go broke due to the infighting and failure to come to an agreement. It seems like a game of who’s going to cave in first.

Of course, we have the 800,000 Americans at home without any pay. It’s not a great time for them, and clearly not a big confidence booster for the economy and the country.

But while the two parties continue to blame each other, America is heading down the wrong path. But then there’s the old saying, “You have to go through hell to get to heaven.” So as we approach the debt ceiling deadline, I guess we’ll have to deal with the default, clean the mess up, and then it’s off to a more viable situation.

Let’s say the shutdown continues into next week, with Columbus Day next Monday, followed quickly by the debt ceiling deadline on Thursday. What then? Well, the government will no longer have funds to pay its bills and debts, as it cannot breach its debt ceiling. The financial system would be sent into disarray, which would impact government debt.

America would be broke and would need food stamps of its own. Maybe the International Monetary Fund or all of the countries the United States has given money to in the past will come forth and help us with mountains of gold. Sounds great, but I don’t see this happening. China has three trillion U.S. dollars in foreign reserves. Maybe it wants to buy more American debt? They probably would, but at much higher yields to compensate for the risk.

The Department of the Treasury says the failure to raise the debt ceiling would drive a default that could have a horrendous impact on the economy, which could possibly cause another recession. This is when you would want to exit stocks and quickly pile into gold, if not before.

And can you imagine the upheaval in the global markets if the debt ceiling was not resolved?

Emerging markets could collapse and countries with heavy trading with the United States could also be greatly affected and forced into another economic downturn.

So, the next few days will be critical for not only the United States but the global economy as well. As the U.S. debt ceiling deadline nears, you may want to consider taking some profits off the table and waiting for a deal to be put in place. In the case that the debt ceiling deadline passes without a resolution, I advise you make sure you have some put options already in place to protect against major market selling. You may also want to look at also exiting some positions in government debt, as the value will most likely fall if the country defaults.

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