Monday, August 1, 2011

The Debt Ceiling Drama

A ceiling is a roof. The top of something that gives it an ending and acts as a shelter.

It is a limit. If one raises a ceiling then one has to ensure the walls go up with it and the foundations are also strengthened to cope with the extra height and weight.

So how are the foundations for the US economy looking then? Employment increasing? No. GDP increasing to match the extra production caused by the 'good debt' at work? Not significantly. GDP for the first quarter in the US was revised down for 1.8% to 0.4%. Perhaps manufacturing and housing starts are showing signs of life? No, still headed downwards.

The foundations are weak and the walls are too thin to support the weight of debt. Each dollar of debt added is now producing less and less GDP growth. When the Government is the main driver of GDP growth, you know you are in trouble. The Government then acts like a huge leech, sucking all the capital out of the system leaving little for small business and growth.The house of cards will fall, its just a matter of when and how.

There are many triggers to the house giving way. One view is, the trigger may be in the politics of the moment. Jim Rickards presents the argument that Tim Geithner has made a huge political miscalculation as regards to the debt ceiling fiasco. His arbitrary date of August 2nd is causing the markets unnecessary panic and dislocation. Tim Geithner, instead of projecting calm and statemanship, has instead projected instability and fear. Markets do not like instability. In Rickards mind this situation did not need to happen Poor leadership is the culprit.

You see, the stimulus package in October 2008, was pushed through using arguments based on fear. The lawmakers were told of complete financial armageddon if the $700 billion dollars wasn't approved. We now know what happened to that money. It went to strange projects around America mostly for the benefit of local poiticians and to liquefy the worlds banks and instituions. TIm Geithner is using the fear card once again.

The debt ceiling will be lifted and the US will not default on it's interest payments. It will probably never happen, at last in the way that people expect. No such statement will come from Tim Geithner saying, "We can no longer pay the interest due on your bonds, therefore we default". No the more likely scenario, as mentioned before in this blog, is a 'sneeky' default through inflationary money printing.

But Tim is playing with fire. What if the drama unfolds in a negative way for him? Life isn't always that predictable. Confidence has been centuries in the making but can be destroyed in days.

Let's hope the market gives Tim another chance.

Gold in New Zealand dollars: $1831.25 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $44.97 per oz
Previous all time high: $59.19
per oz
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The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001
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