The Biggest Game of Chicken

You may have heard by now, our government is going to run out of money on August 2, 2011 (19 days from the writing of this article). And, unless Congress votes to raise the debt ceiling (the maximum amount of debt our government can take on), the U.S. Government will default on its obligations for the first time in history.
So, as this is being written, our fearless leaders are “trying” to negotiate a deal. The problem, is that both sides are so far apart and have dug their heals into the ground and publicly stated that they aren’t budging. So much for negotiating.
We aren’t trying to pick a side. We don’t want our country to default on its obligations. We want the people in charge to start acting like smart and reasonable businessmen and women and come together somewhere between the two poles. If they don’t, well, we don’t like the looks of that.
If they don’t, then the government will have to decide who to pay and who not to pay. The people holding our debt will probably continue to get their interest payments. If we didn’t do that, the results would be worse than we have seen before. So, that leaves Social Security, Medicare, the military, etc… to miss out on their payments.
That would have a profound impact on our economy. Our recovery from the last recession would be stopped dead in its tracks. Consumer confidence would plummet. Any progress in housing would be wiped out as some people wouldn’t be able to make their mortgage payments. Retail sales would drop. And, it is likely the economy would head right back into another recession.
The impact of a partial default would have a swift and deep impact on the stock market. This may happen even before the August 2 deadline if it doesn’t look like a deal is going to be reached. If you remember the first time that Congress voted (down) on the T.A.R.P., the market reacted violently. Then, Congress had a change of heart and went back and passed the bill. And, the market thanked them for doing so. It is not out of the realm of possibility for that to happen again. But, we will have to wait and see.
It is clear that our government has too much debt. But, our country has been enjoying the lowest effective tax rates of the 60 years. Don’t get me wrong, I am not saying that we are advocating for raising taxes. We think it is important to be completely open to all the possibilities to get our country’s economy back on track to being the best in the world.
The problem is that by being so dogmatic, the “negotiators” are playing chicken with our country and our economy. What we need is for the men and women charged with leading our country to stand up and be statesmen and women and shed the egos and ultimatums at the door.
But, what about you and your portfolio? Our recommendation is to stick to your plan and not try to out-think Congress and the stock market. That would be very tricky to get right. Our gut is telling us that they are going to get some kind of a deal done. Just when and what, we don’t know. If you have any questions or would like some additional help with your portfolio, please call us.