Blog | Commodities

A Rotten Easter Egg

As I warned two weeks ago (“Time Ticks Away”), negotiations for lifting the debt ceiling are coming down to the wire.

The consequences of a default would be drastic and dire, as the dollar would crash and the markets would lose confidence in the US economy, but even if a deal is worked out, the middle class will still suffer, as it would require printing more dollars, which causes inflation, and raise taxes.

Over the last week, it’s been interesting to watch one deal after another sour as both parties angle for power and the ability to claim a victory.

Unfortunately, it appears that no matter who wins this battle, the war may already be lost—and the American public will be the casualties.

According to The Wall Street Journal:

Despite the last-minute maneuvering, investors believe officials in Washington will find a way to reach an agreement that allows the government to keep paying its debts. But some worry that any deal might not be enough to stave off a downgrade.

Moody's Investors Service, Standard & Poor's and Fitch Ratings have all warned they might cut the U.S. credit rating. S&P, in particular, has said it could move even if a debt-reduction deal is met and the $14.29 trillion federal debt ceiling is raised.

S&P has cited $4 trillion in debt reduction as a figure that would be appropriate for keeping the triple-A rating. S&P has also said it wants a credible agreement, meaning one that has bipartisan support.

Neither side is close to a $4 trillion figure. And given the wrangling, the chances of strong bipartisan support for any deal seem unlikely, investors said (“Downgrade Threat Looms”).

When I was a kid, my parents would help us celebrate Easter by hiding eggs. When all the eggs were hidden, us kids would run around frantically to see who could find the most eggs. Occasionally, we’d miss one and it’d sit for days or even weeks in the hot Hawaii sun, rotting until its smell led us to it.

Turns out this debt crisis had it’s own rotten Easter egg that no one noticed till now. The wrangling and angling by Washington politicians has put the market on edge and destroyed the confidence of both S&P and Moody’s, putting the US Triple A credit rating at risk for the first time in history.

Analysts at Faros Trading write: “We have gone past the point of no return regarding debt downgrade. We fully expect the US will lose its AAA status.”

“On Friday, I said it was 50-50. Given the lack of progress over the weekend, I would say it’s even higher now,” said Brett Rose, the head of US rates strategy at Citigroup Global Markets regarding a US downgrade.

The fallout from a downgrade would be just as catastrophic as a default on debt. The result would most likely be a panicked exit from the stock market by investors, a full loss of confidence in the US dollar, and a run to gold.

As I wrote about last week (“Gold Is Not Money”), your most important investment is financial intelligence. Whether the US defaults or not, loses its credit rating or not, or finds a way to work a miracle or not, those who understand how money works and have a high financial intelligence will find a way to prosper.

Rather than fear, remember that wealth is never lost—it’s simply transferred. One person’s financial crisis is another person’s financial windfall. I encourage you to remain vigilant and use your financial smarts to navigate the troubled financial waters ahead. There may be some waves along the way, but stay the course, allow your financial intelligence to be your compass, and you’ll reach shore while others are wrecked on the rocks.