Saturday, June 18, 2011

Debt ceiling is not the issue, cut down the spending in USA---By Shan Saeed

Headlines will soon shift from the sexcapades of Rep. Antony Weiner to the debate over the debt ceiling extension. The outcome of this debate could have a profound effect on the markets.

Here's what's at stake. The U.S. government is out of money and needs to borrow more by Aug. 2 to continue to function. The Treasury says it needs a $2 trillion increase in the previously imposed $14 trillion debt limit.

Republicans are holding out for meaningful spending cuts as a condition of the extension. But Treasury Secretary Timothy Geitner, President Barack Obama as well as China and two credit rating agencies are all warning of dire consequences if the debt limit isn't raised by the deadline.

They argue that by not increasing the debt limit, the government could be forced to default on its debt payments and such a default would wreak havoc in the financial markets by sending the dollar plummeting and interest rates skyrocketing. But, the risk of a short term technical default pales in comparison to the risks of not getting spending under more control.

The $2 trillion requested is in addition to the nearly $5 trillion of debt racked up in just the last two years. The national debt has already ballooned more than 55 percent since President Obama took office. Monthly deficits now approach the level of last decade's yearly deficits.

If the government doesn't stop the out of control spending, the U.S. economy could be destroyed. Hyperinflation and a plummeting dollar could doom the U.S. standard of living as we have known it. The wreckage could take decades to repair, if it can be repaired at all. US dollar has lost 50% of its value in the last 26 years against major currencies

While just about everyone claims to understand this problem, Democrats have displayed no intention of cutting spending and have resisted measures to cut spending at every turn. Only the leverage provided by the debt ceiling can force the issue and bring them to the table. Aside from preventing a longer-term disaster, meaningful spending cuts would benefit the economy and the markets in the near term as well.

The U.S. economy right now is like the stock of a company perceived to be going nowhere. Both domestically and abroad, the U.S. economy is viewed to have massive debt problems that government seems incapable of solving. Doing business in the United States is fraught with regulations, huge healthcare expenses and high taxes. The future seems to hold slow growth at best and financial disaster at worst.

Much better investment opportunities exist in the emerging markets, and that's where investments and jobs are going. In order to revive the economy, this commonly held view must be changed. Real spending reform now could tip critical mass in a positive direction.

It would signal to the world that the United States is getting serious about deficits and begin to change the current narrative. These spending reforms won't turn things around all by themselves but will have started down the road to recovery. Down this road the trillions in cash held by U.S. corporations may start to be put to work. Foreign companies might once again see the United States as a good prospect for the future. And, banks might begin to lend again.

An indication that the US government has the will to solve the current problems could quickly change the longer term perspective of the market. The outcome of this debate could determine if the last two years was a bear market rally or the beginning of a long-term bull market. This is an emergency and have no choice but to risk short term turbulence in order to avoid long term disaster. The US is headed for 100 miles per hour toward a brick wall and needed to turn the wheel and risk a fender-bender.

If there is a technical default at some point and it does result in a downgrade of U.S. debt and wreaks havoc in the markets, it will serve as just a small taste of what is to come if the US government don't get spending and deficits under control. Maybe being "scared straight" is exactly what American economy actually needs.

Disclaimer: This is a just a research piece and not an investment advice....

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