> TEOTWAWKI Blog: Economic Armageddon Avoided (for now)



Economic Armageddon Avoided (for now)

Well, in a surprise to very few, Congress bumped up the debt ceiling/"credit limit" by $2.1 TRILLION dollars, avoiding a government default and associated anarchy of biblical proportions.

In exchange for the debt ceiling bump, lawmakers have agreed to cut $2.4 trillion in spending over the next 10 years (uhhh...) and to have a committee identify another $1.5 trillion in cuts by November 23rd. So they get $2.1 trillion in additional debt today, and have to cut just under $4 trillion in "future" spending. Not sure if there are any qualifiers to the "future" spending--it's pretty easy for them to cut spending from some government program 9 years from now. Most of them will be out of office at that point - let the other guys worry about it!

Anyways, the U.S. .gov will not default, for the time being, but there's still the growing threat of a downgrade from credit rating agencies. I'd certainly slap us with a downgrade. A credit downgrade signifies higher risk, and investors require a higher rate of return for a higher risk investments. Higher required rate of return means higher interest rates--which means that Treasury rates would go up accordingly. And since Treasury rates are generally seen as the baseline "risk-free" rate, interest rates would jump across the board.

Across the board means that any kind of loan adjustable rate debt--credit cards, car loans, student loans, mortgages and so on--could see an interest rate spike. That would be awesome for the currently barely growing economy, high unemployment and stagnant wages.

The Federal Reserve, meanwhile, is talking about QE3, which would further downgrade the value of the U.S. dollar. So, we may get a double whammy of higher interest rates and an even more devauled dollar. Fun times!

Fingers crossed on this one, because who knows what Washington will do with this. And, as I mentioned previously, the debt ceiling increase is only a stop-gap solution and doesn't address the real problem. The .gov spends too much and they don't want to cut back. There's already talk of "revenue raising", or taxation as everyone else calls it. I wouldn't expect new taxes during election times, but after elections are over with, we may see an open season on income confiscation, err, taxation.

Getting out of the US $, paying off adjustable rate debt, investing in preps, food storage, precious metals or other tangibles, becoming more self sufficient and less currency dependent would all be valid preparations for financial troubles that may lie ahead.