The Market Is Discounting The Downgrade


Unfortunately the reaction overnight in the market makes clear exactly what is believed about the so-called “debt reduction” plans on both the left and right – that is, they’re lies.

The talking heads are all fawning over the fact that there is no “fear” represented in stocks. Well that may be true and it may not, but it certainly isn’t when it comes to the dollar – down 0.6% with the decline being triggered by the Obama speech last night.

When all is said and done if this gets legs – and I suspect it will – we’re in big trouble.

You have about 2 cents – down to roughly 71.50 – before all-time low support is violated. The premise that such a move will not come when, not if, the downgrade occurs is rather magical thinking, no?

The issue is not “avoiding a default” because no default is going to occur. We have enough tax revenue to pay the interest due; ergo, there is no default. What we’re actually arguing over here is when and how the “free stuff” folks will stop getting their 80 million checks (they mathematically can’t keep getting them on a forward basis.)

There are two choices:

  1. We have an honest conversation and debate with the American people and determine both what we want in services from the government and pair each of those services with tax revenues that pay for the service in the present time. That which we refuse to pay for we cannot have. Not by loading things onto tomorrow via borrowing, but by current tax revenues. This will inevitably result in a ~15-20% reduction in GDP because that current GDP represented by the “hot checks” is false – it is being borrowed into existence so the government can “spread it around” without being able to fund it via current production in the economy.
  2. We refuse to have that conversation and continue to play politics with the issue, promising people their 80 million checks when we know we don’t have the money to cash them. This, incidentally, is a felony when you or I do it (writing rubber checks) but as with most things when Congress does it there’s no cop around to arrest the perpetrators and toss ’em in the clink. In this case the downgrades will come sequentially and borrowing costs will go up until we stop and we will not have the benefit of that debate. Those costs will go up slowly at first, perhaps in an imperceptible fashion initially, but then, without warning, it will come all at once exactly as occurred in Greece, Iceland, Ireland and elsewhere.

There are many who argue that America is “exceptional” and that this can’t happen to us. I assure you – it both can and will. In fact it is a certainty should we choose path #2 over path #1, exactly as it is if you personally choose that path when your income is impaired and fail to find a new job.

There are many who say that a sovereign nation that controls its own currency cannot go bankrupt as it can simply print whatever it wants. This is factually true but ridiculously and intentionally misleading. While it is true that The Fed can “QE forever” to avoid a technical bankruptcy there is no avoiding the outcome.

Let us presume there are $10,000 in the world and there are also 10,000 bushels of corn. That’s the entire economy. In such an economy each bushel of corn has an imputed price of $1.

Now let’s “print” another $10,000. There are now $20,000 and 10,000 bushels of corn. It’s obvious to anyone who thinks about this for more than 5 seconds that each bushel of corn now costs $2. The change in price is inevitable because the divisor has changed due to your act of printing more money.

While it is true that the United States can “technically” avoid bankruptcy the fact of the matter is that for you, I, Grandma and Grandpa that technicality has nothing to do with our reality. Dilution of the monetary base – that is, changing the divisor – will inevitably show up in the prices you pay. The purchasing power of your dollars will be debased, and due to the fact that we refuse to close our borders to unfair trade practices the value of your labor on the world market is free to fall to that of a subsistence farmer in India or China!

These are our choices folks. Both outcomes are ugly, but the second is more ugly. We have created a monstrously-distorted mess in our economy through the abuse of leverage on a serial basis and have spent the last 30 years lying to ourselves about alleged “economic growth” that never really happened.

Make no mistake folks – we’re in trouble, and lots of it. But you wouldn’t know it from the people today, who are entirely-focused on whether Treasury coupon payments will get made next week. That’s idiotic, as those payments will be made. There’s more than enough tax revenue to cover it.

The real issue is the above debate and yet neither side of the political aisle will show up to have that debate with the public and resolve the underlying problem.

This is what our political parties are doing, and this is how it’s going to end.

The time to be prepared is now.

The Market-Ticker

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