By Marc Lichtenfeld, Investment U Research
There's going to be a massive stock and bond market selloff in the first half of 2011.
Not only that, the selloff could cause a worldwide financial disaster, global market crashes and the destruction of wealth that will make the popping of the dotcom and housing bubbles feel like a mild inconvenience.
Why?Because, quite simply, America is playing a dangerous game of "chicken" with its national debt. And the ramifications are extraordinary. I'm going to explain the situation and give you three ways to protect yourself from this mess before it's too late...
Debt Doomsday: Coming in May 2011America's debt ceiling currently stands at $14.3 trillion. This is the level that, by law, the government's debt is not allowed to exceed. Trouble is, the government's present debt has swelled to $13.7 trillion. This means that at the current rate, we're on course to smash through that $14.3 trillion ceiling around May 2011 (although it might happen a month or two later, depending on what budget cuts are enacted in the next few months and how quickly they're implemented). So what will the government do about this? Same thing it's done almost every year since 1962: Raise the debt ceiling so America can pay its bills. Congress really has no choice in the matter either. If the ceiling isn't raised, we've got a problem. A very big one.
A Fistful of DominosWithout Congressional approval for additional debt, the U.S government cannot pay its bills -- most notably, interest payments on treasury bonds, bills and notes. If America defaults on those payments, or even misses them by just one day, the domino effect would be brutal:
- Domino No.1: The country would lose its AAA credit rating and those bonds, bills and notes would no longer enjoy their status as the safest investments on the planet.
- Domino No. 2: In turn, a lower credit rating would mean that the United States would pay higher interest on its bonds in order to attract investors. Result?
- Domino No. 3: A tidal wave of selling through fixed income markets, driving interest rates higher still.
- Domino No. 4: Social Security would be hit hard, as its funds are invested in Treasuries. Suddenly, Social Security would have far less resources than just a day or two earlier.
- Domino No. 5: If money is pouring out of so-called "safe" investments, you can bet that in that kind of environment, the demand for riskier investments would be next to nil. Stocks and financial markets around the globe would plummet.
To Raise or Not to Raise?Simple: This year, some members of Congress have said they won't vote to raise the debt ceiling. And they may be serious this time. Earlier this year, 38 Republican senators voted against raising the ceiling. However, they did so, knowing full well that they'd be outvoted and that the limit would be raised despite their "objections." That way, they could return to their Congressional districts, claiming some semblance of fiscal responsibility.
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