What is The Worst Case Debt Ceiling Scenario?

Is The U.S. Government Playing With Fire Regarding The Debt Ceiling?

worst case debt ceiling scenarioOctober has been a monumental month for the United States.  For years now, congress has been kicking the can down the road as far as the debt ceiling and budget deficit is concerned and unfortunately, October 2013 has brought us head to head with our two worst enemies.  For awhile during the year it’s easy to pretend as if there are no consequences to the wild spending of American dollars that we do not have and are not generating by our economy.  It is during these moments when we are brought face to face with the consequences of our actions, or rather our inaction as a nation that we realize the potentially far reaching consequences of the continual financing of our future.  The government has currently been in a state of shutdown now, for over two weeks, and tomorrow we cross the threshold of the debt ceiling.  Congress is still throwing a few SOS bills around in an attempt to extend the debt ceiling in a temporary bill, but if we’re truly honest, this congress has not accomplished anything in the last two years, what can we expect from them in the next 24 hours or the next couple months for that matter if there is a temporary extension of the debt ceiling?  Even a temporary measure is going to bring this situation to a head once again in a few short months. The question we should be asking is what is the logical end to different scenarios of the debt ceiling situation playing out? 

Congress Will Kick The Debt-Ceiling Can Down The Road?

In one, rather likely scenario, congress will avoid a default on the government debt by a temporary bill, passed at the last minute, causing the immediate avoidance of a debt default, but also creating a scenario of no long-term solution.  In this situation, the U.S. will continue to print money, devaluing our currency at a mind-blowing rate.  Debt will still continue to accumulate as almost 40 cents on every dollar spent is borrowed money, and the U.S. economy and dollar will become further eroded as time goes on, leading to the high likelihood that the U.S. will lose its status as the world reserve currency, the petrodollar, and ultimately will lose its ability to sell its debt to foreign nations.  When or if this happens we will see a rapid devaluing of the U.S. currency, oil and gas prices will go through the roof, and bond yields will skyrocket as no one will have any desire to purchase and hold a U.S. Treasury.

If this scenario seems unlikely to you, it is important to note that there has already been a push by the Chinese to pass the Yuan as the next “petrodollar”.  On September 12th, The Yuan was approved for oil exchange in many countries including Russia and the UK.  If the dollar is no longer a necessary middle man in the purchasing of oil, which nation is going to want to hold such an unstable and overvalued paper currency?

What If No Bill Is Passed To Extend The Debt Ceiling?

There is also the slight possibility that congress refuses to pass even a temporary measure to extend the debt ceiling in an effort to continue funding the U.S. government for a short-time. While this scenario is unlikely, its possible consequences are immediate and great.  If this were to happen it would lead to an instant default on the U.S. debt, a credit downgrade, and immediate financial hardship for the markets both here and abroad that will plunge the world into a massive global depression.  This is the worst case immediate scenario, and its likelihood is still rather small at this point in time.

Regardless of what happens tomorrow in congress, there are some difficult decisions and some tough times ahead for the U.S. dollar.  Looking down the road, it will be those who were prepared and poised for any scenario who continues to have affluence and financial well-being.  Those who stay involved with primarily dollar based assets will feel the deep effects of the dollar’s destruction.  Remember, in any economy and in any scenario there is profit to be made, and financial security to be attained, it is simply a matter knowing the long-term trajectory of the dollar and which assets will perform given it’s slow ruin.  For more information on how to protect your finances given the inability to sustain the U.S. debt and the value of the dollar, speak to a Redhawk Wealth Advisor near you today.

 

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