What You Need to Know About the Debt-Ceiling Crisis

Here's the headline of the year: Apple (Nasdaq: AAPL  ) now has more cash than the U.S. Treasury. As of Wednesday, the U.S. government had an operating balance of $73.7 billion. Apple has $76 billion in the bank.

Laugh at that, feel free to shed a tear, and now here's the latest on the debt-ceiling debacle.

The House of Representatives has passed a bill to cut the deficit by just under $915 billion, raise the debt ceiling, and move toward a balanced-budget amendment in the Constitution. Both the Senate and President Obama have already indicated that the bill is dead on arrival. It's now up to each chamber of Congress to settle their grievances and craft a bill that can pass by Tuesday, when the Treasury says it will run out of cash if the debt ceiling is not raised.  

What is the debt ceiling? It's a self-imposed limit on the Treasury's ability to borrow. Reaching the debt ceiling does not mean the U.S. is bankrupt. Investors around the world are breaking down the doors at the Treasury to lend us money. This is a purely self-inflicted crisis.  

Importantly, raising the debt ceiling is not merely about making room for future spending. It's about Congress deciding whether it wants to pay for the laws Congress has already passed and is committed to. The ceiling has been raised 87 times since 1945, almost always without fanfare.

What happens to the government if the ceiling isn't raised? The Treasury says it will run out of cash on Tuesday. Others think higher-than-expected tax receipts could extend that by a few days. President Obama has indicated he's open to extending the debt ceiling for a few days if more time is needed to hammer out a last-minute deal.

If the Treasury does indeed run out of cash, someone won't get paid. Whether that ends up being bondholders who are owed interest -- meaning defaulting on our debt -- is unknown. The government will take in $2.1 trillion in tax revenue this year and owe around $200 billion in interest payments to bondholders. Yes, there's plenty of revenue over the course of the year to cover interest payments, but this isn't a fail-proof backstop. Money flows into the Treasury in lumpy amounts that can fluctuate wildly from month to month. It isn't a lack of annual revenue, but a cash-flow problem, that could cause the Treasury to default.

Furthermore, some legal scholars have indicated that the Treasury cannot prioritize payments to bondholders, but this is still a gray area. Others say the Treasury can't prioritize based on ethical arguments, such as paying Social Security checks in favor of defense contractors. In that case, payments might be made first-come, first-served.

Bottom line: No one really knows what will happen. We've never before faced this problem.   

What happens to markets if the ceiling isn't raised? That's the trillion-dollar question. In an actual default, there would undoubtedly be some degree of panic, particularly in the banking sector (think September 2008). Banks and money-market funds that rely on Treasury bonds as bedrock assets would be thrown into disarray. The financial system is held together by confidence. Losing it is not something you want to play with.

But the odds of default are low. More likely is a credit downgrade from one of the major rating agencies if a deal to raise the debt ceiling doesn't also significantly cut future deficits. This would probably push the nation's credit score from AAA (perfect) to AA (still good). All major rating agencies have the U.S. on "negative" credit watch, meaning a downgrade could happen in the near future. Historically, countries are downgraded 56% of the time they find themselves on negative watch.

A downgrade wouldn't be catastrophic, but it shouldn't be taken lightly. In general, an AA-rated nation pays more to borrow money than an AAA-rated nation -- interest rates are higher by 0.7%, on average. A rise of that magnitude could hammer the stock market and increase the cost of mortgages, credit cards, and other forms of borrowing.  

As I wrote this morning, a 0.7% rise in interest rates would add $100 billion a year to federal borrowing costs and could slow economic growth by around 1% a year. As a rule of thumb, that could cost roughly 1 million jobs.

What should I do with my money? Probably nothing. There's never a good time to panic, and decisions made during emotional upheavals are usually regrettable. If you were happy with your portfolio last week, you should be happy with it next week. This, too, will pass.

We've known this day was coming for almost nine months. Why are we just starting to vote days before default? Feel free to direct your frustration to your local Congressperson.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 29, 2011, at 7:08 PM, mike2153 wrote:

    I just wish the Tea Party idiots would crawl back under their rocks and let intelligent people make reasonable decisions.

  • Report this Comment On July 29, 2011, at 7:16 PM, morningstara wrote:

    I hope you are right about the survival of my stocks....I'm a small time person investing a small time amount--but it's a lot to ME. That's the key here. We need to work together--big and small interests--to fix this problem. Obama wants to, keeps saying he will, but the factions in our OWN GOVT work against every move he tries. I would not want his shoes for a million bucks.

  • Report this Comment On July 29, 2011, at 9:17 PM, plowhandle wrote:

    There's a foolproof way to know when we have a Dem for president -- the entire GOP unifies against raising the debt. GOP says keeping the debt at or below current figure is vital to our future--just not vital enough to merit raising taxes. The only new jobs that the tax decrease created are overseas.

  • Report this Comment On July 29, 2011, at 11:10 PM, Bujutsu wrote:

    I would just like to agree with the first poster above (mike2153) regarding the Tea Party idiots.

  • Report this Comment On July 30, 2011, at 12:07 AM, ShaunConnell wrote:

    I would like to thank the world for making my gold, silver, swiss franc, and international portfolio do good.

    That is all.

  • Report this Comment On July 30, 2011, at 12:40 AM, crewchachi wrote:

    Not sure why morningstara doesn't want to have Obama's shoes, or how ShaunConnell's gold, silver and other commodities "do good" instead of evil. But perhaps the oddest comment is in regard to the Tea Party. I'm impartial to the party, but America is incredibly stupid in having a two party system. It essentially guarantees that pathetic standstills like this one with the ludicrous government spending will occur regularly. A three (or more) party system would at least allow for more compromise and possibly more reasonable discourse. Unfortunately, that goes against what the two parties in charge would like, and that's perhaps manifested in the simple-minded way people are taught to dislike the Tea Party. Based on the moronic and wasteful government spending, and the way it only increases year after year, I'm surprised more people don't back a third party that would want some semblance of fiscal responsibility.

  • Report this Comment On July 30, 2011, at 12:46 AM, ShaunConnell wrote:

    crewchachi, I meant "good" in that it's up. Keep up, son.

  • Report this Comment On July 30, 2011, at 1:29 AM, TrumanTrout wrote:

    Another interesting article, Morgan. Thank you.

    I'm wondering about the problem of Congressional nondisclosure of trading that Rich Smith brought up last year in his article "Highway Robbery on Capitol Hill, Part Deux." It seems to me that the current fiasco is the ultimate opportunity for those with insider knowledge of the timing of debt ceiling resolution or gridlock to unethically profit from it. This should be illegal, but short of that, it should at least be disclosed.

    TrumanTrout

    P.S. Help wanted: 535 people who are capable of solving even the simplest problem.

  • Report this Comment On July 30, 2011, at 5:17 AM, no0bxor5000 wrote:

    There are still a lot of people who have no idea that cuts are necessary. And yes, the cuts will eventually have to include Medicare and Social Security. Most people aren't completely ignorant, but I think many are when it comes to this issue. The numbers don't add up. It is one giant pyramid scheme and it is going to come crashing down with the retirement of the Baby Boomers.

  • Report this Comment On July 30, 2011, at 10:51 AM, WINESBYGEORGE wrote:

    I can not understand why many are calling the Tea Party members idiots. This is a small but growing group that has rocked the boat in order to make the old dogs in Congress wake up to the fact that Treasury is almost bankrupt and they must change their spending habits. If there is a default , all hell will break loose on the market. The national deficit has to be lowered and tax loopholes must be closed.Without the Tea Party screaming from the chamber , it would be business as usual. Obama has been absent during this whole proceeding and has no plan of his own. He will go out on another campaign trip on 8/3 and then on vacation to Martha's Vineyard with all the other millionaires he scorns. No leadership here.Just one meaningless speech after another. At least the TP members are waking people up to the fact that we are facing a major problem and action must be taken now.

  • Report this Comment On July 30, 2011, at 12:07 PM, jdg143 wrote:

    The federal government has grown unreasonably and dangerously huge, not because anyone wants it that way, but because incentive traps make it easy to add agencies and spending programs and next to impossible to cut them. Even the Constitution (which most programs added since 1900 violate, at least if you believe the Federalist Papers) hasn't restrained them since FDR's threat to pack the Supreme Court.

    Result: either we draw a line in the sand and STOP it, or the problem will grow until we have runaway inflation like most of South America did in the '70s -- the major difference being that there is no possibility of the IMF or any similar entity ever being big enough to rescue the United States.

    I would like to think that officials are concerned about this possibility and working to prevent it. But read the writings of Obama's cabinet members and it's clear they WANT this disaster to happen. It's unacceptable to them that rich people continue to exist.

    That point of view is unacceptable to me.

    As for Social Security and Medicare, they are Ponzi schemes and mathematically must collapse if they aren't ended voluntarily. The only hope for people now depending on them to come out reasonably intact is that Congress accept this fact and close both programs to anyone born after, say, 1980. The states, or charities, or (hopefully) individual saving will have to pick up the slack.

  • Report this Comment On July 30, 2011, at 12:15 PM, Mliaom wrote:

    The best description to this whole drama. Calm voice. Thanks Morgan.

  • Report this Comment On July 30, 2011, at 12:31 PM, crca99 wrote:

    Why don't the moderates speak up? There are at least 500 of them between the 3 dozen extremists on either fringe.

    How did the US evolve a 2-party system that mandates voting the party line? Seems election financing needs to change. Threats of cutting off campaign endorsement funds should not determine the outcome of major votes.

  • Report this Comment On July 30, 2011, at 12:33 PM, debtdebacle wrote:

    winesbygeorge, the reason people think the teaparty are idiots is they tend to be all over the map regarding this issue. The most prominent Tea Party members say that a default will not cause the major problems you just wrote about in the markets. The Tea Party has some very good points and it is a wake up call that we need as a country. We need to make cuts including programs such as social security, medicare and medicaid. But we also need to raise taxes and eliminate deductions and loopholes. Some say that will have a "job killing" effect. But we had years under the Bush era tax reductions and the economic growth simply was not there. Why continue to hold the line on a policy we have already tried? The major problem that I see here is that all sides get so entrenched they do not want to compromise. And simply kicking the can down the line by cutting spending and not touching the social programs is unfair to our youth.

  • Report this Comment On July 30, 2011, at 12:45 PM, Pennypincher57 wrote:

    Thank God for the Tea Party. At the rate of growth of the debt, the U.S. is headed for an overwhelming debt servide load Well, actually, it already has that, but it's getting worse very rapidly. And accelerating. At least some people are making a lot of noise about it and trying to stop it. As for the two party system, it appears to me that the old line politicians, elephants and donkeys, haven't a clue. They will force the formation of a third party, probably the Tea Party.

  • Report this Comment On July 30, 2011, at 1:34 PM, PeyDaFool wrote:

    I would like to thank Congress for creating unnecessary drama, therefore driving the price of my dividend stocks down as they repurchase shares through dividend reinvestment at lower and lower cost basis.

    One day we will realize that it's the current stupidity and hard headedness that allowed us diligent investors to become independently wealthy!

    Keep it up, guys! Don't stop until JNJ hits $13.50 a share and PG is selling in the single digits!

  • Report this Comment On July 30, 2011, at 3:01 PM, redfrckle wrote:

    What bothers me is the subjective nature of the rating companies, who have much too much control over the world's economy, yet have personal responsibility for much of our economic turmoil. Is it a coincidence that S&P threatens downgrading US credit ratings after the SEC announces an investigation into S&P's fraudulent activities? Is S&P throwing smokescreens so we will forget how much they contributed to the 2008 crash? I find it disconcerting that ratings agencies meddle so much in politics via blackmail. Power hungry monsters like David Beers need to be held accountable.

  • Report this Comment On July 30, 2011, at 3:35 PM, fermata49 wrote:

    @redfrckle - you are so right about S&P and Moody's. I love watching the mainstream media hanging on Mark Zandi's every word when in fact he and his ilk helped bring the whole thing tumbling down in 2008 (and well before) with their willful ignorance to what was going on with mortgage backed securities.

    @plowhandle - this is not a uniquely republican problem. Obama, as IL Senator, voted with all his democratic compatriots back during the GWB years to, guess what, deny raising the debt ceiling, for no more reason than to make a political point. Yes, it's more dangerous now, but both parties make things up.

    I support third parties; the two party system is too easily corruptible, but I certainly don't think the Tea Party is viable as a political party. Their seeming interest in fiscal responsibility thinly veils their real motives, which actually have much more to do with religion and other social issues.

  • Report this Comment On July 30, 2011, at 5:05 PM, jmlerche wrote:

    I'd like to give a nod to TrumanTrout. I to thought of that article and it seems to me that it's just to easy for less than 1000 people to control/manipulate markets AND make a profit from it without it being illegal. If one congressman, associate, or family member makes one cent off of this mess due to the fact they had insider information they should be put in prison. It just adds to the fact(?) that the markets are to easily manipulated and the little-guy-smart-investor gets fleeced.

  • Report this Comment On July 30, 2011, at 7:09 PM, VirginiaBob wrote:

    In August, after paying for tuition, room, board and books, you give your college-bound son a credit card "for emergencies". In late September, the bank calls and tells you that charges exceeding the card's $25K credit limit have been made by your life-of-the-party son. They ask if you would like to raise the card's credit limit. What would you do?

    This dad would cancel the credit card, put my son on a cash allowance, and commence my son's real education. Lesson #1: Money doesn't grow on trees. Real people work real hard to earn real money. Lesson #2: You can recklessly spend other people's money for only so long. Sooner or later the party is going to stop. Lesson #3: Irresponsibility has consequences. Lesson #4: Operating on a cash basis assures that spending does not exceed income.

    Yes, this dad would make good on the debts my son had already incurred. That is my legal and moral obligation. However, I would be an idiot to allow the status quo to continue.

    Well our son is named Congress and they need a real education. Lesson #1: Money doesn't grow on trees. Real people work real hard to earn real money. Lesson #2: You can recklessly spend other people's money for only so long. Sooner or later the party is going to stop. Lesson #3: Irresponsibility has consequences. In this case they are called elections. Lesson #4: Operating on a cash basis assures that spending does not exceed income. This is called a Balanced Budget Amendment.

  • Report this Comment On July 30, 2011, at 8:24 PM, Bert31 wrote:

    "We've known this day was coming for almost nine months. Why are we just starting to vote days before default?"

    Actually we have known about this since stimulus and obamacare was forced down our throats. No money to pay for it but the Democrats addicted to spending were on a 2 year binge. Then Americans woke up and elected Tea Party Patriots who said they would do the adult thing and stop the reckless spending.

    It is simply amazing to me that so many writers and readers on the Fool have such scorn for the Tea Party. Imagine the U.S. was a business that was losing money and for almost three years did not have an operating budget, and then an acitivist investor came in and started demanded changes to make the business accountable to its shareholder. I hope the Fool would support such action and it seems to me that this is what the tea party is doing in Washington. The Motley Fool is not what I thought it was.

  • Report this Comment On July 30, 2011, at 8:35 PM, hartley87 wrote:

    These articles about Apple having more money than the US Treasury are insanely misleading and manipulative. They are talking about $76 billion in assets like it is all cash sitting in an account haha. Look at Apple's Q-10, you will find that about 1/7th of that is actually cash and most of the other assets are not easily liquidated at all. I don't know if this is a purposeful misrepresentation of the truth or if these journalists just don't know how to read a balance sheet, but it does not even remotely represent reality.

  • Report this Comment On July 30, 2011, at 8:37 PM, hartley87 wrote:

    Maybe Apple should spend some of that money on sustainability initiatives and try to counteract what they are doing to this planet.

  • Report this Comment On July 30, 2011, at 8:41 PM, TMFHousel wrote:

    <<Look at Apple's Q-10, you will find that about 1/7th of that is actually cash and most of the other assets are not easily liquidated at all.>>

    What assets in Apple's cash equivalents calc would be tough to liquidate?

  • Report this Comment On July 30, 2011, at 8:48 PM, TMFHousel wrote:

    ^ Should have been Apple's securities, not cash equivalenst. All are level 1 or 2.

  • Report this Comment On July 31, 2011, at 12:46 AM, anuvaka wrote:

    It appears to me that the Congress does not recognize the importance of the debt ceiling.

    Should we pass an amendment that all Representatives prove they have graduated 6th grade and understand math?

    I see the problem as people holding to ideals and not looking at the immediate problem. If we were not at War, this would not happen. If we regulated mortgages or bank loans this would not happen.

    The solution seems to be decreasing the payments to the lower and middle classes where the problem was created by the upper and very upper classes.

    Somehow, this seems unfair.

  • Report this Comment On July 31, 2011, at 6:46 AM, skypilot2005 wrote:

    On July 30, 2011, at 10:51 AM, WINESBYGEORGE wrote:

    "I can not understand why many are calling the Tea Party members idiots. "

    In some liberal “circles” it is fashionable to “label” groups of people. Many times the labels are not accurate.

    Labeling a group is easier than having an honest debate on the merits of their positions. In my opinion, it is either laziness or lack of knowledge on the part of the “labeler”.

    Sky Pilot

  • Report this Comment On July 31, 2011, at 9:00 AM, arcflash wrote:

    Time to vote out commmunism ( Obama,demacrats). This will help usher in free market capitalism, PLAIN AND SIMPLE.

  • Report this Comment On July 31, 2011, at 9:55 AM, dcflipflop wrote:

    Morgan, thanks for the link to "contact your congressman." From my limited following of the news, it seems that the Senate might be the more stubborn in this matter. So here is the Senate link for anyone who'd like to contact their Senators:

    http://www.senate.gov/general/contact_information/senators_c...

  • Report this Comment On July 31, 2011, at 1:05 PM, eyeammi wrote:

    This is why we should outlaw party affiliations and disparate private campaign contributions and or personal holdings for political use. We should force our government officials to stand on their own convictions and purge the debilitating 2 party loyalty system. How are we to expect good decisions out of Washington when choices have been reduced from meaningful conscious debate about the issues at hand to an endlessly entrenching power struggle that's more concerned with keeping the party in office and the campaign finances flowing than in serving the American People to whom our so-called representatives have been intrusted to serve.

  • Report this Comment On July 31, 2011, at 1:32 PM, FoolSolo wrote:

    Lots of interesting comments here, with oddly familiar divisions, almost like our Congress.

    One way or another this standoff will pass, and then it's business as usual. The big discussion here should be about positioning to win when we get to the other side of this stalemate.

    Our government is not what I would call a shining example of diplomacy or democracy, more an example of disfunction. This is what bothers me when the USA tries to brandish "democracy" in places like Iraq, Afghanistan, middle east, Asia and other countries. The resultant excursions are costing us a lot, and in the end they ring somewhat hollow, which most foreigners can see right through.

    At this point in the struggle, I think the USA needs to cut spending, starting with our military and overseas operations in Iraq and Afghanistan, and we need to send our elected officials, every one, to "Accounting 101" - i.e. spending within your means and saving for a rainy day. This is simple stuff, but somehow our elected officials just don't get it, precisely because most of them are just elected for a short time. Their preoccupation is pleasing their party and opposing whatever the other party wants, while trying to make themselves look good for re-election. They don't put America first as they preach, and they certainly don't think of the long-term good of the nation versus the short-term parody on Capitol Hill.

    I wrote a nasty letter to my local representative a week ago, asking him to stop the shenanigans and start prioritizing what is important to our nation. I suggest you do the same, and remind them that they are elected to represent US, not their own personal interests.

    May God bless us all!

  • Report this Comment On July 31, 2011, at 2:01 PM, neil777 wrote:

    TBWDan wrote: "Actually we have known about this since stimulus and obamacare was forced down our throats. No money to pay for it but the Democrats addicted to spending were on a 2 year binge."

    BUT in REALITY the healthcare reform will reduce the debt. READ this:

    http://www.thedailybeast.com/newsweek/2010/03/20/how-health-...

  • Report this Comment On July 31, 2011, at 2:05 PM, neil777 wrote:

    Also, the U.S. Government is not a corporation, thank God.

  • Report this Comment On July 31, 2011, at 3:45 PM, TruffelPig wrote:

    Politics is getting more and more idiotic. The US 2-party system is rotten. The worst idiots are those Tea Part losers. There is really nothing good one could write.

  • Report this Comment On July 31, 2011, at 8:51 PM, musk0020 wrote:

    @ neil777

    I think it is a mistake to rely upon the Daily Beast/Newsweek as a source for information (thanks for the link, read it... much speculation, no data to support it)

    Look at the below link, regarding a published article entitled "National Health Spending Projections Through 2020: Economic Recovery And Reform Drive Faster Spending Growth" published in Health Affairs, July 2011. The 1st author is Sean P. Keehan, who happens to be an economist at the Office of the Actuary, Centers of Medicare and Medicaid Services (CMS).

    http://content.healthaffairs.org/content/early/2011/07/27/hl...

    if this link doesn't work, try this next one & download the article.

    http://content.healthaffairs.org/content/early/2011/07/27/hl...

    Now, if I had to trust information, one must consider the source. This article, form people who know much more about the topic than myself, and I suspect you as well, suggest otherwise... that the Affordable Care Act (AFA) will dramatically increase the cost of healthcare, which will just make the current federal debt even worse.

    Intuitively, consider this. If one has a broken system of payment for medical care for a population of people without insurance, which simply attempts to control costs by paying 20-30% (max) reimbursement vs private insurance, those who are providing the service will attempt to defer their financial loss elsewhere... on those who have private health insurance.

    Now, when you mandate an increase of the number of people covered with "affordable care", this will only increase costs.

    There are many ways to see how people think that there is a moral imperative to provide care, but this will have the predictable response for driving up care.

    If you don't believe it, cite the one single subsidized government program which actually runs under budget and save money.

    Let me help you... ZERO.

    BTW, if you have any investments whatsoever, you should start to pray that the US Federal and State Governments start to run themselves like businesses. That is, unless you want to be living and protesting in Greece, except with 300+ million people.

  • Report this Comment On July 31, 2011, at 9:04 PM, musk0020 wrote:

    @ TruffelPig

    Can I have a credit card in your name with a credit ceiling of say, either $160K so I can pay my professional student loans off your wallet? Or perhaps only $ 65K so I can finally start building equity in my home, again, off your wallet?

    I'm surprised that here, on The Motley Fool, there s such derision for the idea that one should live off a balance budget. I may not agree with absolutely everything the Tea Party folks promote, but I believe a reason why there is such anger directed at them is because many of those who profited from the system as it was, or led the system to where it is now during the past several decades (politicians) would rather not consider their own responsibility in the financial mess our government finds itself in currently.

    One has to wonder, do these folks care?

    Hold on to your investments, do NOT panic, the market will recover. Watch for deals and buy when the market dips.

    Perhaps the vitriol should be directed against the politicians in office who still don't seem to get the fact that there comes a limit to borrowing and spending... that is, unless it is part of a plan to "change" the country into a socialist country. If that is the case, then perhaps those who don't like the debate that is occurring now, should have been angry about this issue decades ago. Now that it s here... deal with it.

  • Report this Comment On July 31, 2011, at 10:24 PM, markzzzzzz wrote:

    The tea partiers are right! Even the comprimise talking about tonight adds another 9 trillion to our childrens and grandchildrens debt .

    We will still turn into Greece if we don't get Obama out of office and absolutely anybody running into office.

    Kick the socialist shria law loving obama out and put a tea party loyalist in.

    Kristy Noem and Michelle Bachman tell the truth.imho

  • Report this Comment On July 31, 2011, at 10:35 PM, MrArbitrage wrote:

    What if we are downgraded? It doesn't matter in the LONG RUN. Such credence given to S&P is clealy the tail wagging the dog. As I wrote before a single media pundit was questioning the relevance and credibility of S&P or Mooday's:

    July 23, 2011

    Newsflash for the Pundits: Analysts have a poor collective track record

    by Scott Ryan

    Officials from Standard & Poor’s and other credit rating agencies told a gathering of Republicans this week that a default on the nation’s debt by the federal government could lead to a “death spiral” in the bond market.

    We have enough tax revenue to make our interest payments so –not- increasing the debt ceiling shouldn't lead to a default on the interest payments. The significance of what has taken place in this incident is being misinterpreted.

    Pundits Bill O’Reilly, Kudlow, Charles Krauthammer and old guard Senators like James Coburn are championing the status quo. Krauthammer is contending that Republicans have “over played their hand” and “appear as unreasonable”.

    The fundamental problem with their melodrama is they are all making the mistake of assuming that the proffered opinion of S&P and Moody’s is somehow an axiom. Nobody is asking the question, who are these people and –why- should we blithely give their opinions credence? I take issue with the very premise. The notion that our debt- should- be DOWNGRADED based upon the debt ceiling not being raised is erroneous at its core and here’s why.

    The people at these ratings agencies are merely analysts with their own opinions and are subject to their personal biases like anyone else. One thing that I have found about financial analysts in my career as a Financial Advisor is they are dead wrong at least as often as they are right. How soon we forget that many of these analysts slapped AAA ratings on CDO’s and CMO’s that were packed with tranches of pure garbage, liar loans. Most of these analysts LOVED the general obligation municipal bonds that were recently hammered down in valuation. Several years before the meltdown, municipal bond traders at a major global wire house told me that standard procedure was for these bond ratings agencies was to automatically slap a AAA+ rating on a GO bond if that state or municipality simply purchased an insurance policy from the muni bond insurers like MBIA & AMBAC. By the way, those insurers are not sound. One of the top bond insurers, AMBAC went bankrupt this past November and MBIA is on life support at best. Most of these muni bonds trade steeply below their IPO prices in the secondary market and are being propped up along with the junk bond market by the Federal Reserve’s exceedingly low interest rate policy.

    Sure, we could see a self-fulfilling prophecy where our bonds trade down on Monday after a week of apocalyptic rhetoric. But the major buyers of US Treasuries in the primary market now have MORE reason to bid the price of Treasuries UPWARD as a result. The indisputable fact is that thanks to the tea party movement, we have finally elected a group to congress who recognize the gravity of the situation and are willing to stand up to the demagoguery that has for decades led to the pitiful compromise that CAUSED this situation. That cause has been the appeasement of and by self-serving politicians who rasied the debt ceiling over and over and over again - in order to buy votes.

    If the GOP led congress had capitulated and done what their predecessors have done for decades, follow the path of least resistance, they would have signaled to the world that we do not have what it takes to save this country from certain bankruptcy. We do not have TIME to make symbolic gestures with diminutive cuts and growth killing tax increases, regardless of what some academic quants think at Standard & Poors. Smart money, i.e. countries and entities who buy up tens of billions worth of US paper – should have MORE confidence than yesterday that we are going to be able to exercise the fiscal discipline requisite to maintain these obligations into the distant future. I maintain that despite the manipulative rhetoric of Barack Obama and Harry Reed, the outlook for Treasuries and the US dollar is much more positive today than it was yesterday as a result of Boehner walking away from business as usual.

    The “smart money” do not make their commitments based upon the prosaic reasoning of a Standard and Poor analyst. If prosperity truly was a corollary to reading an S&P report, the analysts at these agencies and the webmasters who publish the reports would be the wealthiest people on the planet because they get the “analysis” first. The strength of the US Treasury cannot be buttressed by Standard and Poors but rather the integrity of those who stand behind it.

    Given the dismal track record of the analysts, I would no sooner solicit their subjective opinion on any financial instrument than I would that of an art or movie critic like Rodger Ebert. Ebert may be just as reliable. Concerning the scare tactics of the senate liberals, the last people I would listen to on fiscal matters is a group of elected ambulance chasers. The President would be much better suited to capitalizing on “slip and fall” victims. He and the rest of the lawyers should stick to that which they understand.

    With the power of over-reaching government agencies like the SEC and a rogue Attorney General at his disposal, I can’t help but wonder what type of communication might be taking place between the Obama administration and executives at these ratings agencies that are profitable businesses in the highly regulated industry of Wall Street. Just saying - it might merit an investigation as the timing of their sudden proclamations could be perceived as somewhat peculiar.

    As to the specious contentions of the establishment media pundits, they should be questioned as well. Krauthammer accusing them of “over playing their hand” (by not betraying us like they did before we lost our majority) - has a deceptive look of legitimacy because of the polls these pundits cite. In the same hour the pundits on Fox were was citing a poll that shows 60+ percent of Americans do NOT want the debt ceiling raised, these pundits cited a poll indicating that some 40%+ would “blame the Republicans if the debt ceiling isn’t raised”. Those two polls are actually somewhat congruent. The problem is that Krauthammer and the rest of the panel frame the polls and use their voice inflection to portray that as a NEGATIVE. If 60%+ of Americans DON’T WANT the debt ceiling to be raised – we should WANT the blame, especially if we actually BELIEVE in the cause which we advance!

    - Scott Ryan

    mrarbitrage@tableofwisdom.com

    As one who likes to consider the record thought processes of those whose opinions I take into account, below are some relevant highlights to compare to the opinions of the analysts with whom I have for years taken issue.

    My warning from June 2002 about the next crisis being in the banking sector:

    http://boards.fool.com/my-warning-from-june-2002-about-the-n...

    "I fear that the next crises will be in the banking sector...The disease is a different kind of cancer. It's a seemingly inanimate form that is quickly devouring our foundation, which solely rests upon faith, character, morality and integrity. Independence Day is around the corner. Instead of having the nerve to sing the audacious request of “God bless America” right after we formally proclaimed in our Government God, you have no place in America, perhaps we should get on our knees and sing “God forgive America”."

    "If they decide to get suckered into that Keynesian philosophy and try to SPEND our way to prosperity, we are going to have to jack up taxes, which will be the final death blow to this economy".

    - MrArbitrage Sept 21,2001 http://boards.fool.com/the-panacea-to-our-economic-emergency... (Time stamped by posting at 3rd party website)

    Here’s a recent example of what Wall Street analysts bring to the table in terms of expertise. One day after I came out with a Buy recommendation on Under Armour, Inc. common shares (UA), an analyst from the most historically revered firm, Goldman Sachs came out with a Sell recommendation:

    2/23/2009 MrArbitrage initiates his BUY.

    "Goldman responds with a SELL: Under Armour-UA initiated with a Sell at Goldman 02/24 05:43 AM."

    Beautiful call Goldman.

    Historical quote for: UA

    Monday, February 23, 2009 (date of Goldman's Sell rec)

    Closing price: $14.12.

    July 22nd: Share Price: $80.00

    http://boards.fool.com/mrarbitrage-on-ua-long-22309-27464429...

    At Table Of Wisdom.com (link below) I have compiled years worth of other time-stamped, 3rd party, independent linked documentations of egregious analyst ratings along with my own detailed remonstrance. The great Dr. Burton Malkiel has an excellent book titled A Random Walk Down Wall Street in which he expatiates on the track record of the analysts. The book is a classic and was influential in shaping my outlook more than any other investment book author. I highly recommend reading it.

    More… including warnings on GM woes from 2001-2003.… http://www.tableofwisdom.com/p/my-track-record.html

  • Report this Comment On July 31, 2011, at 11:25 PM, mikecart1 wrote:

    Obama is the greatest President of all time! Stop making fun of him and blaming him for everything!... wait today is August 1st, not April 1st HAHAHAH!

  • Report this Comment On July 31, 2011, at 11:35 PM, neil777 wrote:

    musk0020

    And I should trust the content from healthaffaris.org because....

  • Report this Comment On July 31, 2011, at 11:36 PM, neil777 wrote:

    It's called misinformation.

  • Report this Comment On July 31, 2011, at 11:39 PM, neil777 wrote:

    If it hadn’t been for two wars, the tax cuts of 2001 and 2003, the housing meltdown, and the subsequent financial crisis and recession, the nation’s finances would be in fine condition today.

  • Report this Comment On August 01, 2011, at 12:44 AM, wildnatives wrote:

    I'd like to repeat the comment to hold onto your shares and look for bargains.

    The US debt is a horrible chain around the neck of this country but this whole issue with the debt ceiling is Congress acting like a bunch of school kids playing politics.

    Maybe since it now looks like they may have reached a compromise, the folks who have quietly been making progress in terms of reducing the debt can make some meaningful changes.

    Tea Party

    I think there are definite advantages to a 3 party system. It forces all parties to work harder to reach agreement but politicians are always going to play politics so be careful what you wish for. For example, if you vote for a third party and that takes votes away from one of the other two. You may get a representative or you may just allow the person you like least to be elected.

    Ethics

    All of us (the public) need to make the time to let our politicians and companies know that the boring old virtues of honesty, ethics, frugalness or at least the ability to understand that you can't spend money you don't have!, integrity, and accountability matter.

    Hope

  • Report this Comment On August 01, 2011, at 1:14 AM, justinmaxwell86 wrote:

    "A rise of that magnitude could hammer the stock market and increase the cost of mortgages, credit cards, and other forms of borrowing." if that is true, wouldnt that be good for credit card companies, or is it all relative?

  • Report this Comment On August 01, 2011, at 12:23 PM, MRCLAASS wrote:

    It seems that the more inflation we get, the more things cost.

  • Report this Comment On August 01, 2011, at 12:33 PM, MRCLAASS wrote:

    Man, if the US goes into default, imagine the rock bottom stock prices you could pick up... Financials are still over priced, given the inflating dollar. If the US defaults and the dollar debased, China will be begging to purchase manufactured goods such as automobiles, generators. Manufacturing output will rise. Stocks that will pick up will be Ford, GE etc.

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