Insulin for Uncle Sugar

The Sunday night headlines tell me there is no agreement to raise the U.S. government’s debt ceiling. The left end of my radio is convinced that a failure to keep borrowing means defaulting on the debt. They’re wrong:

assuming we have $150 billion (I'm a pessimist) in revenue to spend [for the month of August].

First, there's what we must pay.  That's $29 billion in interest.  We have $121 billion left.  Everything else is, legally, a choice.

[emphasis in the original]

Denninger works through the choices, and somebody—or bodies—will not get what they are expecting. But fully funding the raft of Social Security and VA benefits, plus paying the troops and returning zero-interest loans to the IRS tax refunds leaves more than $12 billion.

The headlines over the weekend were warning that not agreeing to more debt would crash stock markets around the world. Lefty radio, presuming default, also presumed higher interest rates. I’m not convinced they’re right on that one, either.

Maybe a minor rise, to reflect some uncertainty over how it will all shake out. But a borrower stumbling into some fiscal responsibilty is good news for a creditor.

And a larger rise in interest rates makes investing in the dollar more attractive. In essence, higher rates tend to mean the value of the dollar goes up. And that means the dollar price of commodities (like oil and gold) go down.

Without debt-fueled Federal spending, demand for some commodities (like oil and construction materials) will drop. That also means a lower dollar price.

It all comes together as a deflationary contraction. Since markets are forward-looking, the leftoids and chicken littles are probably correct about weak week for stock traders. Except for those who hold cash, and those who have sold short.

On the flip side, if the ceiling is raised, expect that new debt to appear very quickly in rising prices for commodities. That means continued inflation, just like the past two years since TARP and the spendulus.

For the ordinary person not employed by government and not dependent on handouts, no agreement is good news. Some adjustments may need to be made, and some of the money saved at the pump will have to be paid to the banksters. But overall, those who are working come out ahead.