"Default?!"
by Jeffrey Saut, Chief Investment Strategist, Raymond James
August 1, 2011
âNew Low: 6% Think Congress Is Doing a Good Jobâ â Rasmussen, July 26, 2011
âNew High: 46% Think Most in Congress Are Corruptâ â Rasmussen, July 27, 2011
Public outrage finally surfaced inside the D.C. Beltway last week as Congressional and White House telephone switchboards âlit up,â as did their Internet URLs, with angry citizens wanting our leaders to act like grownups and resolve the Debt Ceiling fracas. And why not after the political posturing, scare tactics, and misuse of words that has taken place over the past few weeks. Default is one such word. To wit, on a number of media venues last week I opined that the U.S. would not default on its debt obligations. Consider this; Investopedia defines the word âdefaultâ as, âThe failure to promptly pay interest or principal when due.â In my opinion the U.S. government will NOT default on its sovereign debt because the collateral damage to other fixed income vehicles that are âgearedâ to Treasuries would be devastating. As the Standard & Poorâs organization writes:
âHypothetical Scenario 3: No Agreement To Raise The Debt Ceiling, Increasing The Specter Of Default
- Congress and the Administration cannot agree to raise the debt ceiling by their August 2 deadline.
- Treasury sharply reduces spending and after a short time misses a coupon payment and the U.S. rating is Selective Default (SD).
- World credit markets seize up and equity markets fall sharply.
- When credit markets reopen to the U.S., interest rates are significantly higher.
- Over a matter of months the dollar loses 10% or more of its value.
- The U.S. economy falls quickly back into recession.
- The U.S. sovereign rating drops to AA/A - 1+/Negative.
In short, this scenario would produce an unprecedented financial crisis.â
Again, âIn my opinion the U.S. government will NOT default on its sovereign debt.â If, however, it does not raise the debt ceiling there would be an urgent need to prioritize where the $200 billion per month accruing to governmental coffers would be spent. Obviously, I think our sovereign debt obligations would be first, followed by Social Security, veterans checks, folks on disability, military personnel, etc. The people likely to be the biggest casualties would be 2.8 million federal workers and the ~5 million state workers that would probably be furloughed when departments like HHS shut down. Yet while everyone is focused on the current debt ceiling crisis, there is a cathartic moment at hand that could potentially change the course of our nation.
Recall, the American Revolution planted the seeds that led to the French Revolution because the American victory inspired the thinking that governments should serve the people, not vice versa. Verily, it was the writings of Voltaire and Rousseau that spread said mindset to the common man, eventually allowing Napoleon to seize power and institute the Napoleonic Code, making the legal system more fair and accessible to all. Fast forward, at the beginning of this year Iranian student protests surfaced again and seemed to spill into Tunisia. Accordingly, since January I have been reflecting on the American â French Revolution cause and effect sequence as I watched events unfold in Tunisia. To me, the seeds of the Tunisia revolution were indeed sewn by the Iranian student riots of 2009 and 2010, which occurred not only in Iran but in other cities around the world. While the Iranian Green Movement was suppressed with the closing of universities, brutal beatings, firearms, etc., it became known as the âTwitter Revolutionâ because protestors used various social-networking sites to communicate with each other, as well as other protestors throughout the Mid-East region. This is why the movement has also been labeled The Persian Awakening.
The Tunisia revolution ended with the collapse of despot Ben Aliâs 23-year dictatorship, which was the first collapse of an Arab leader due to the uprising of the common people e-v-e-r. Shortly thereafter, Egyptâs Hosni Mubarak resigned from his 30-year rule, amid the cheers of hundreds of thousands of emotional Egyptians. That was followed by similar riots in Bahrain; currently the freedom struggle has morphed to Syria.
If this sequence sounds familiar, then you have likely studied Arnold Toynbeeâs analysis of the rise and fall of civilizations. Toynbee explained how societyâs elite rise to the challenges of the times, and find solutions, even if those solutions call for a radical break with the past. As the brainy GaveKal organization writes:
