The “common wisdom” going unchallenged by the media and those talking to the media is “If the US Government defaults, the Stock market will Crash!”\u00a0\u00a0 The Sky is falling!<\/p>\n
I don’t believe that to be true – in fact the opposite is extremely likely.\u00a0\u00a0 There are two main reasons for that right off the top of my head<\/p>\n
1)\u00a0 If the credit rating drops, it’s fairly likely that interest rates will zoom up – without borrowing authority at the Treasury, Bernanke can’t “soak up” all the “bad” US debt into the Federal Reserve System and hide it.\u00a0\u00a0\u00a0 When interest rates go up, the value of bonds goes down – a LOT (especially long term bonds).\u00a0\u00a0\u00a0\u00a0 In order to not be clobbered by a loss in value in bond holdings, big investors will either unload their bond holdings or try to hedge their bond holdings with interest derivativee contracts like interest rate swaps.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 If they sell off their US Bonds,\u00a0financial instutitions\u00a0have to do something with the cash – FDIC doesn’t cover insurance company portfolios.\u00a0\u00a0 They can’t just leave the money sitting in cash in a bank.\u00a0 One logical alternative would be to invest in high quality stocks or very high quality corporate bonds – or convert them into a more stable currently like the Swiss Franc<\/p>\n
2)\u00a0 If the treasury defaults, the foreign exchange (FOREX) rates for the dollar will fall apart.\u00a0\u00a0\u00a0 As I’ve pointed out so many times I’m tired of saying it, whether the US Stock market goes up or down is almost entirely driven by FOREX rates.\u00a0\u00a0 If the dollar gets worth less and falling, the price\u00a0of stocks (not to be confused with the value of the stocks)\u00a0goes up in the short term\u00a0– people want to unload their dollars into something more substantial than dollars.\u00a0\u00a0 Things like profits, unemployment rates, GDP growth take years to blend themselves into the value of the stock market.<\/p>\n
Should the dollar plummet off the charts, that means anything we import will be very expensive suddenly – the biggest thing being gasoline and other oil related products.\u00a0\u00a0 $10 a gallon for gasoline is not hard to imagine.\u00a0\u00a0\u00a0 The US Economy will grind to a halt!\u00a0 (right?).\u00a0\u00a0 Not so fast.<\/p>\n
While the costs of things we import will rise, the price of things we make will become unreasonably cheap to other countries.\u00a0 Canadians will be able to buy a brand new US made car for $10,000, Germans wanting to buy a condo in Florida will buy them up as fast as they can be made, food exports\u00a0will flood places like China.\u00a0\u00a0 People with big piles of dollars will want to turn them into something *real* as fast as they can.<\/p>\n
The problem is that the United States would at least initially be hit with hyperinflation.\u00a0\u00a0 The silver lining of that cloud is it solves the problem of upside down mortgages as real estate zooms up in price.\u00a0\u00a0 Also, if Oil was suddenly $300 a barrel, you can’t begin to imagine how fast derricks will show up in Texas and North Dakota to start doing oil fracking and deep wells..<\/p>\n
So don’t believe everything you hear on TV or from Barack Obama or John McCain.\u00a0\u00a0 Economies are self-correcting if governments just resist the urge to steer them in a direction they don’t want to go.\u00a0\u00a0\u00a0 Once everyone unloads their dollars and Europe is in recession due to cheap US imports, the FOREX exchange rates will return back to the level they should be at now without the overmanagment being done by Tim Geithner and the Obama regime.<\/p>\n","protected":false},"excerpt":{"rendered":"
The “common wisdom” going unchallenged by the media and those talking to the media is “If the US Government defaults, the Stock market will Crash!”\u00a0\u00a0 The Sky is falling! I don’t believe that to be true – in fact the … Continue reading