I think Michael Pento is right on this one. While failing to make a deal may hurt the stock market, the bond market is not likely to crumble because the gov’t will continue to pay interest on its debt. However, the money printing machine would grind to a halt. Stocks would face the problem of increased economic slowing, with decreased government spending to support it. This would be deflationary and should have a positive effect on the Dollar, and a negative effect on stocks, oil and commodities. – Ilene
Courtesy of Michael Pento at Euro Pacific Capital
.jpg)
It is extremely difficult to get two teams to compete for the championship trophy, when one team is assured victory if they decide NOT to play. That’s how it is for the republicans. The GOP is awarded the grand prize of no tax hikes and $10 trillion in spending cuts over the next decade—and as an added bonus not a penny increase in the debt ceiling—if they decide not to compromise at all with the democrats. If there is no deal reached by August 2nd, the republicans are automatically granted everything they want and more. Therefore, as I stated a few weeks ago, the consummation of a deal will be much tougher than anyone expects and the chances of no deal at all are highly significant.
Perhaps that is the true message of the bond market. Everyone is puzzled as to why yields are quiescent when there is a supposed to be significant risk that the U.S. will default on its obligations in a matter of days. But, if there is no deal on August 2nd, bond prices will rise and yields will fall; contrary to what Timothy Geithner and the rest of the fear mongers would have you believe. That’s because our government will be forced to pay interest on the debt and make cuts elsewhere in the budget. The dramatic reduction in debt supply will force prices higher and yields lower. In addition, capping the total amount of outstanding debt at $14.3 trillion will serve to boost the confidence of our foreign creditors in the notion of long-term U.S. solvency, Also, inflation would be reduced because the Fed would have to print less money in order to monetize U.S. debt–thus making Treasury ownership much more appealing. Maybe that’s not such bad news after all.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
Pic via Jr. Deputy Accountant
