Insights + Resources

The D Word Haunts Wall Street

Jul 5, 2011

Is there a chance that America could actually default on its debt?

A pig hitting the debt ceiling
What will happen to the ceiling?

When will the debt ceiling issue be solved?  The NFL, the NBA, the EU, Congress … wherever you look, it seems people would rather wrangle these days than resolve their differences. The U.S. Treasury has set a hard deadline of August 2 for Congress to settle its divide on the federal debt ceiling, and if partisan bickering interferes, the world economy could suffer a severe hit.

 What would happen if we miss the deadline? According to federal budget analysts at the Bipartisan Policy Center, the Treasury would only be able to make a slight majority of its 80 million monthly payments in August. Treasury Secretary Timothy Geithner would likely be put in the same position as a struggling consumer low on cash and behind on his bills: he would have to selectively decide which debts to pay for the month and which to ignore.1

Should August 2 come and go without a solution, Congress’s inaction (and Geithner’s subsequent decisions) would have dramatic global repercussions. Most likely, his big priority would be to pay off bond investors so that a formal default wouldn’t occur. Yet even if these institutional investors are assuaged, the Treasury would still have to postpone millions of payments at home … payments to Social Security recipients, federal employees, contractors and soldiers possibly among them.1

So technically, America wouldn’t actually default come August 2 – certain federal payments would be delayed. The federal government’s existing revenue stream is decent enough so that it could still pay interest and principal on unpaid debts. 2

 That said, the postponed federal payments would have a dramatic impact on cash flow, consumer spending, consumer credit and even interest rates.

 S&P threatens to give America a D. The venerated credit rating agency says it will cut the U.S. debt rating from AAA all the way to D if the debt cap isn’t increased by the August deadline. (That’s right – the U.S. would go from the best credit rating to the worst.) Moody’s has indicated it would cut the U.S. rating to somewhere in the Aa range, which is three steps beneath its highest ranking.3

On Bloomberg Television, S&P sovereign rating committee chairman John Chambers warned that a U.S default would rock global markets in a way that would be “much more chaotic” than the shock from the 2008 Lehman Brothers bankruptcy. Fitch Ratings is less gloomy; on June 21, it characterized the U.S. as “very likely” to raise its debt ceiling before the deadline looms.3

 It may just be a matter of time. This negotiation is ultimately like so many others: a ticking clock will exert the most leverage. Given the gravity of what could happen, concessions will inevitably occur, a deal should happen (albeit probably at the eleventh hour), and both sides will put their own spin on the agreement. Until then, a hint of tension haunts Wall Street.

Citations:

  1. money.cnn.com/2011/07/01/news/economy/debt_ceiling_deadline/ [7/1/11]
  2. money.cnn.com/2011/05/23/news/economy/debt_ceiling_deadline/index.htm [5/23/11]
  3. bloomberg.com/news/2011-06-29/moody-s-would-likely-cut-u-s-debt-rating-to-aa-range-in-event-of-default.html [6/30/11]
  4. content.usatoday.com/communities/theoval/post/2011/06/poll-obama-leads-gop-candidates-but-remains-vulnerable/1 [6/3/11]5 – montoyaregistry.com/Financial-Market.aspx?financial-market=tax-loss-harvesting&category=31 [7/3/11]
  5. montoyaregistry.com/Financial-Market.aspx?financial-market=tax-loss-harvesting&category=31 [7/3/11]

Tags:

More Insights

Sep 18, 2019

Do you have an extra $33,000 to $100,000 to spare this year? How about next year, and the year after that? Your answer to these questions is probably “no.” What could possibly cost so much? Eldercare.  According to the AARP Public Policy Institute, a year of in-home care for a senior costs roughly $33,000. A year … Continue reading “Your Extended Care Strategy”

Sep 16, 2019

“Why is my portfolio underperforming the market?” This question may be on your mind. It is a question that investors sometimes ask after stocks shatter records or return exceptionally well in a quarter. The short answer is that even when Wall Street rallies, international markets and intermediate and long-term bonds may underperform and exert a … Continue reading “Your Diversified Portfolio vs. the S&P 500”

Sep 13, 2019

During your accumulation years, you may have categorized your risk as “conservative,” “moderate,” or “aggressive,” and that guided how your portfolio was built. Maybe you concerned yourself with finding the “best-performing funds,” even though you knew past performance does not guarantee future results. What occurs with many retirees is a change in mindset – it’s … Continue reading “Your Changing Definition of Risk in Retirement”

Sep 11, 2019

Addressing the potential threat of long-term care expenses may be one of the biggest financial challenges for individuals who are developing a retirement strategy. The U.S. Department of Health and Human Services estimates that 69% of people over age 65 can expect to need extended care services at some point in their lives. So, understanding … Continue reading “Understanding Long-Term Care”

Sep 9, 2019

The American family with a child born today can expect to spend about $233,610 to raise that child to the age of 18. And if you’ve already traded that supercharged convertible dream for a minivan, you can expect your little one’s college education to cost as much as $198,000. But before you throw your hands … Continue reading “Getting a Head Start on College Savings”

Insights + Resources >
We are preparing the questionnaire, please let us know through the contact page if you want to be notified when it's available.
Thank you.

Epic IMPACT Quarterly Newsletter

To Receive Our Quarterly Impact Newsletter:

 
Your privacy is important to us. We will not rent or sell your information.

Epic Market Commentaries

To Receive Our Market and Economic Commentaries

Your privacy is important to us. We will not rent or sell your information.

7 Steps for Investing with Impact

 
Your privacy is important to us. We will not rent or sell your information.