Wednesday, July 27, 2011

The Sky is Falling (Again)


Have we had our fill of bogus predictions yet? The Watchman has!
  • The sky is falling! The sky is falling! --Chicken Little
  • “Everything that can be invented has been invented” --US patent office, 1899.
  • “There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will.” – Albert Einstein, 1932.
  • Y2K will cause massive disruptions around the world!
  • By 2010 there will be 50 million environmental refugees as a result of global warming! – United Nations, 2005.
  • If we don't pass TARP, the financial system will collapse!
  • If we don't raise the debt ceiling by August 2nd, financial Armageddon will ensue!

Speaker Boehner, adjourn the House and go home for the summer. You have done your work and there is nothing left to do. A deal cannot be reached with the Senate or the President. If the Democrats truly believe that financial Armageddon will commence on August 2, they can sign the Cut, Cap, and Balance Act sitting on the Senate's desk.

But the truth is, they don't believe their own scare tactics, so they won't move heaven and earth to make sure the debt ceiling is raised. So why should you, Speaker Boehner? The sun will rise as usual on August 2nd and again on August 3rd. The world will not end. Financial Armageddon will not ensue. And the Democrats know that.

However, by adjourning the House of Representatives, you afford the Democrats the opportunity to test the courage of their convictions. Maybe they will say to themselves, “Oh my gosh, we aren't going to get the Republican's to fold, so we better sign whatever we can!” Maybe, but I doubt it.

It's important to remember that Moody's and Standard & Poor's do not set interest rates. They attempt to guess at the risk level of a given debt instrument. And they do so poorly. They missed Enron, WorldCom, and the savings and loan crisis. They are not a leading market indicator, they are a trailing indicator. And they don't set rates, the debt markets do that.

It's entirely likely that when the US loses its vaunted AAA credit rating, there will be no change in treasury bond yields. The difference between AAA and AA is minor. Often there is no interest rate difference.

When the Euro collapses, as it surely will within the next year, money will flood into treasuries as a 'safe haven'. That will drive T-bills up and the interest on T-bills down. That move will make the credit rating agencies look awfully foolish. They really should be asking themselves this question: if the US dollar is not the safest currency on earth, which currency is? The Euro collapse will make their AAA ratings for countries like Austria, Finland, and Denmark look pretty foolish.  The collapse of the dollar won't come until late 2012 or early 2013

So go home, Speaker Boehner. The sun will come up tomorrow.

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