Brinkmanship Surrounding Raising Debt Limit May Rattle the Markets

George Brooks  |

No one in their right mind, not even a politician, would prevent an increase in the debt limit. This is about enabling funding for programs that have already been approved, but also about applying leverage to achieve a meaningful solution to the nation’s surging National Debt.

Brooksie’s Daily Stock Market blog
-an edge before the market opens.

Wednesday May 11, 2011

DJIA: 12,760.03
S&P 500: 1357.16
Nasdaq Comp.: 2871.89
Russell 2000: 855.91

The raising of the debt limit will dominate the news in coming months with the potential for a meaningful impact on stock and bond prices.

Most likely, Congress will take it right down to the wire (possibly late July) with stumbling blocks NOT limited to deficit reduction, but to unpalatable riders attached that wouldn’t stand a chance of passing on their own.

It stands to get ugly. Expect the press to make the most of it as it trumps up the possibility that the United States “could” renege on its debt.

So far, the Street isn’t concerned, as the market presses upward out of last week’s correction.

As I mentioned yesterday, raising the debt limit has occurred on dozens of occasions without a lot of dithering. The problem is, as a percent of GDP, the National Debt has been on a tear over the past ten years.

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Failure to raise the debt limit would, of course, be catastrophic for the nation, resulting in a default on our debt. Among other things, that would result in the inability of the U.S. government to borrow any money, meaning it can’t pay its bills, the loss of our Triple A bond rating, soaring interest rates, a crash in the bond market, a financial crisis that dwarfs the one we just went through, the loss of the U.S. dollars status worldwide, soaring oil prices and a plunge in stock prices.

That’s why I expect Congress to raise the ceiling.

It is possible that the issues agreed on leading to an agreement to raise the debt limit will also comprise the framework for Congress’ assault on the nation’s growing national debt.

While supporters of both parties will become outraged by their opponent’s proposals, even feel betrayed by concessions made by their own party, a constructive, fair to all concerned resolution would be enormously bullish.

A huge cloud overhanging the perception of our nation’s fiscal future would be lifted, and that has to be bullish here and abroad.

Is this unrealistic with all eyes on the 2012 presidential election ?

I can only hope not.

What’s important here is that investors are aware of the possibility that the investment environment could get very scary as a very partisan Congress slugs it out, thus providing a great buying opportunity in coming months.

Like I said, the Street isn’t worried now, and even appears to take it for granted that Congress will raise the debt limit, even craft the beginnings of a tack on arresting the surge in our National Debt, which realistically is a product of both a shortfall in revenues, as well as excessive spending.

George Brooks

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