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The Bottom Line: The Debt Ceiling

Sorry, it has been awhile since my last article. Between work and the whole effect/affect issue of the last article, I decided to take some time off from writing.

Just in case you missed the last article. The title was; “How to chose an affective Banker.” Now, the readers of the article, quickly, and might I add, quickly corrected me, and gently explained that the word I was looking for was “effective” not “affective.”

“Dammit Jim, I’m a banker, not an English teacher…”

For that I say “Thank you.” Now, let us never speak of it again.

Now, on to the good stuff…

The debt ceiling is one of those news stories that everyone hears about but very few understand. As I write these articles, I see a certain pattern of political grandstanding emerge. Basically, every year the government sets the amount of debt that the country is willing to take on, and every year that number is exceeded.

We have two opposing parties with the exact opposite ideas on how to set this year’s debt ceiling. In this corner, we have the Dem’s, their idea is to increase revenue in the country, so we are better situated to deal with the debt. Raising revenue is a term used, when raising taxes polls badly. The Repub’s on the other hand, are in love with the idea of tax cuts as well as other major cuts, mainly to entitlement programs like Medicare and Social Security. The Repub’s believe in these tools so much that talks have all but stalled, with the leaders of the GOP basically walking away from the table. The idea being that America cannot take on anymore debt, and if cuts aren’t going to be discussed in a serious way, they believe that the talks aren’t worth having. The Dem’s believe that they are on the side of public opinion and are just as happy to let the other side walk away because they aren’t willing to discuss deep cuts to programs that are seen to help the middle class. Of you thought this reminds you of a big game of political chicken, you’ve been paying attention.

Here’s the Bottom Line…

The debt ceiling is going to get raised. Let me repeat that, its going to get raised. This is not America taking on more debt, it’s the countries ability to pay the debt we already had. Neither side wants to be the first one to blink, so we get this stare-down. Both sides also think they have the timing right, and just before any real damage is done to the economy, they will come with some sort of compromise.

What very few understand, is the implications if the debt ceiling is not raised or if it seems as if it will not be raised, or even if other nations realize that political parties will use the debt ceiling, and the US economy to gain some political ground.

The US economy is the fastest, most stable economy in the world. An entire host of nations rely on the US economy for their own. The US dollar is the global standard currency and most if not all countries have a healthy amount of US currency in reserve. America’s credit rating is held in high esteem, as we have never defaulted on any obligation in the nation’s history. Not, World War I or II, not the Great Depression, or the Great Recession. If the nations of the world lose faith in America’s credit rating, the US dollar or the political stability of the population, a very quick chain of events could occur. US bonds will be riskier than the past which will drive demand away, and prices down. The US dollar will lose ground to the already artificially priced Yen and Euro. In essence, the linchpin of the global economic structure will have late to pay the bills. With America is that weak of a position, who has the cash, the economy and the political will to take this nation’s place? China.

China has the cash, 1.4 billion held in US treasuries. If the strength of the dollar tanks, China will seek to rid itself of all that weak currency by dumping it in the market, effectively weakening the dollar even more. China will then attempt to make its currency work more efficiently, quickly swooping down and saving country after country for the horrible fate that “The American” have caused. So, the next time you hear someone from Washington speak about watching out for China and how we need to remain the last Superpower, you can smile a little and remember this article.

The chance that the US government will take its own economy behind a barn and shoot it remains minimal. They are playing a game of cat and mouse, and most believe that a deal will be reached well before any damage is done. Both parties will claim victory, and if something goes wrong, they will blame each other. As is the way of the world. But, next year…next year is an election year, and once again…we get to tell our duly elected representatives that we are not in awe of your political cunning when the reputation of the country as well as the global economy is in the shape it’s in and you want to use it to play a game. If America is allowed to default on its obligations…we will be more than happy to give all 435 a promotion. We can promote them to “Private Citizen.”

Bottom Line.

Be the first to find this article helpful.

About the Author

Brandon Byes, M&I Bank
1101 Walnut
Kansas City, MO 64106

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