-- Posted Thursday, 14 July 2011 | | Disqus

Rick’s Picks

Thursday, July 14, 2011

“Phenomenally accurate forecasts”

We’ve been treating the debt-limit donnybrook on Capitol Hill as a joke, just like everything else that goes on in Washington, but it now seems more than remotely possible that the issue could turn gravely serious. Even allowing for the usual brinksmanship, it’s hard to imagine what concessions either side might make at this point  that would be significant enough to break the logjam. For its part, Moody’s – as big a laughing stock as D.C. politicians since the Great Financial Collapse of 2008-09 – has put America’s AAA credit rating “on review” for a possible downgrade, sending the dollar into spasms late Wednesday afternoon. Of course, there’s no way in hell Moody’s would actually downgrade U.S. credit, since that would trigger financial Armageddon.  Consider the mayhem that downgrades have already caused in Europe, where credit spreads for the PIIGs have widened as much as 250 basis points over German bundts. This has put the PIIGs in a financial death spiral that all the official happy-talk in the world can no longer counteract.

Now try to imagine how a mere 50-point widening of spreads would affect a U.S. credit edifice that dwarfs Europe’s.  Add just a paltry few basis points to the interest paid on nearly $15 trillion of federal debt for a year or two, and pretty soon you’re talking about real money.  And then you could start worrying about how it would affect adjustable-rate mortgages in a depression-bound real estate sector, and the interest paid by households on revolving charge accounts. It would also knock Obama’s fiscal assumptions for a loop, since he’s counting on the fed funds rate to average 2.5% between now and 2020. If credit problems should cause this rate to revert to the 5.7% average that has obtained since the early 1980s, the additional borrowing costs would add $4.9 trillion to the U.S. deficit, according to the estimate of Bill Buckler, editor of The Privateer (one of our very favorite reads, by the way. Click on the link for a free sample).  If that were to push the Obama administration’s laughable, 4.2% GDP growth estimate for the next three years down to a still-wildly-optimistic 2.5% between now and 2020, it would add $4 trillion more to the deficit, notes Buckler.

A Shortfall? So What?

Under the circumstances, perhaps the politicians could end their squabbling by agreeing to implement a flat tax. Steve Forbes has been pushing this great idea for years, arguing that simplifying the tax code would stimulate growth. Who could disagree with him? Trouble is, our elected leaders are worried that the generally lower tax rates that would come with a flat tax might not produce sufficient revenues to feed the Federal maw. At this point, though, with Democrats and Republicans splitting relative fiscal hairs over chicken-s**t Ten-Year Plans, what would be the harm in trying a new tax system, even if there were risk that it might produce, say, a $300 billion shortfall for a year or two?  While a shortfall of that magnitude would be all to the good for business, investment and consumption, it would amount to just a drop in the bucket in the context of monetary policy that has produced little more than a multi-trillion dollar financial bubble in the stock market.

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts.  Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2011, Rick Ackerman All Rights Reserved. www.rickackerman.com 

-- Posted Thursday, 14 July 2011 | Digg This Article | Source: GoldSeek.com

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