You gotta be thinking about this…at least I hope you are. If you’re an investor with any portfolio of substance, the unrest associated with the financial institutions was nothing compared to what the sovereign debt default continuum might bring. Here’s how I see it playing out:
Sovereign debt is going to default en masse. Greece is just the beginning. Ireland, Portugal, France, Italy, and Spain will set off a chain reaction that dismantles the European Union. The masters of the Old World will tighten the screws while the people take to the streets. Americans will be horrified when they see this. I think Americans will demand drastic spending cuts from our government. The American people will wonder why we borrow money from other nations to offer free military defense to those very same nations. America may selectively default against those nations in a bi-partisan demonstration of disgust: the leftists will cite human rights and the neo-conservatives will giggle in delight that they can “harm” the Chi-Coms and Islamo-Facsist States through the most unconventional of weapons- the debenture.
Americans will respond to this default of our sovereign debt with a HUGE demand for government to be reduced drastically. The sovereign default and subsequent currency collapse will be the light that shines brightly, exposing all of the cockroaches in the room. NO will become the new YES for politicians but it still won’t be enough. Woe betide the politician that expands existing entitlements programs come election day.
The U.S. Dollar will be devalued but so many other currencies will have collapsed it won’t feel too painful (unless you buy stuff from or travel frequently to Switzerland). Financial pandemonium will last for about two weeks until the most likely technology emerges with a solution backed by the most likely institutions. Tin-foil hat theorists shouldn’t worry about the One World Currency because demand for competing currencies will rise and the most likely technology will find a way to partner with asset protection firms.
Think through this. One Sunday morning, you wake up and log on to my favorite news site to discover that the US Treasury announced it would default on its debt obligations. Before you answer, consider to whom we owe money; the list might surprise you:
- #14- Depository Institutions (i.e- banks- the places where you park your money)
- #11- Insurance Companies (one of whom may hold the GIC in your 401-k)
- #9- Oil Exporters (who would have to raise the price of oil to reharvest the losses)
- #7- Pension Funds- (who guarantee your retirement “income”)
- #6- State and Local Governments-(who, in turn, could default on federally-backed loans)
- #5- Mutual Funds- (no explanation needed)
Now, here’s the big one. The Federal Reserve Bank is the largest holder of US Treasury securities. This means that we owe more money to…ourselves than we owe anyone else. Are you scratching your head like I am?
How would a domestic default affect you? I’m pretty sure chaos would be the immediate result but if you read the linked article, you’ll find that I’m fairly optimistic that chaos wouldn’t be a permanent condition. Long-term, I could see some great benefits to our economy. Relatively speaking, I think a US default, following Europe, would cause a “reset” in our financial markets and that favors the United States.
Short-term, there would be fuel, water, and food shortages. I can’t see that lasting more than a couple of weeks, (nothing a garage full of bottled water and canned goods couldn’t cure). Long-term, I think it would signal the end of fiat currencies, highly-leveraged fractional banking, and a rise in barter, all of which are interesting to me. More interesting is the effect this might have on the currency and real estate investing.
Rahm Emmanuel thinks that he should never let a good crisis go to waste so I’d expect the Administration to try to exercise greater control over the real estate market. That might be kinda tough for them to accomplish. Fannie and Freddie would be dead, The portfolio lenders (as we know them) could be insolvent, and private investors (READ: Hard Money) would most likely have taken a big hit. We would have…a liquidity crisis.
I have no answers nor suggestions for you (yet). I think some sort of technical default is more likely than not so I’m interested in your opinion.