Dead Cat Bounce

How many of you are keeping track of the debt ceiling talks going on in Washington D.C.? If you aren't you should be.

If you are not sure what all the political wrangling is about it boils down to us, the United States of America allowing (or not allowing) ourselves to raise the limit on the amount of money we can spend above our currently owed debt. The U.S. is spending way more money than it currently has coming in. How do we pay for all of our cool toys? We borrow money from other countries. Oh, we don't call it 'borrowing' per se. What we do is sell the idea that America is so awesome that you should 'INVEST' in us. How do other countries invest in our great country? We sell bonds of course! We will give you the privilege of buying a small piece of the United States for a certain amount of time and when that time is up, we will give you all of your money back plus interest! Yea!

Sounds kinda cool right? Being the biggest baddest kid on the block there is no way the U.S. would default on the loan payments, let alone the actual payback of the entire loan. Well guess what? We are days away from the beginning of the worst economic crisis this planet has ever seen.

Hyperbole?

Our economy is so intertwined with the rest of the world, it can legitimately called the de facto economy. Every country in the world has purchased billions upon billions upon billions of dollars worth of U.S. bonds. (Our currency can also lay claim to the #1 spot on the charts in terms of who wants it) The reasons are many with the big ones being to stabilize their own currency, creation of long-term reliable income based on the guaranteed buy-back of those bonds at specific periods of time, and a hugely stable asset that provides insurance against their own lending of money to other banks and countries. Stable that is, as long as the United States doesn't default on those payments.

Right now, markets around the globe are extremely jittery due to the economic meltdown in Greece. The Germans and French, who have the most to lose if Greece defaults on their almost $500 billion debt, have been pushing hard on the Eurozone countries to raise another $100+ billion dollar bailout on top of the already $110 billion given last year. If Greece does default, the countries that lent the money become hugely vulnerable to a run against their own banks, be next in line for major economic fallout, and possible default.

If you look at the numbers involved in the Greek debacle, $500 billion, it should give you pause. During the economic crisis of 2008/'09 here in the U.S., the Treasury lent (forced) half that amount on our 9 largest banks. If the emergency measures had not been taken, our economy (and the rest of the world) would have gone into a prolonged period of what can only be called an ice age. Here is the interesting part of that story and what is happening now.

In mid-September of 2008, the Federal Reserve and the Treasury Department realized that our financial system was on the verge of collapse and that they needed to do something about it. Of course by this time everyone on Wall Street not only knew that the worst financial crisis since the Great Depression could happen, but that it was only days away. With this economic meltdown on the front door, the Fed and Treasury put together an emergency plan to free up $700 billion dollars to enfuse into the US banking and financial institutions. Wall Street knew that this cash was needed and held their collective breath as Congress got the bill to look over.

As the American public began to realize that the banks had been pulling a fast one on us with the credit-default swaps and toxic mortgage loans, we became enraged to learn that we had to bail them out of the mess they had put themselves and us in. We screamed and shouted to our Congressional representatives that we would not take kindly to anyone voting for this money to be allocated to the fat cat Wall Street bankers. Unfortunately, us Americans were naive to the sheer size of our economy. Anyone on Wall Street can tell you that hundreds of billions of dollars are exchanged every night in inter-bank loans alone. The seemingly jaw-droppingly $700 billion dollar bailout was needed just to STABILIZE the markets. It wasn't meant for actually saving a particular bank, but to keep the faith between banks so that they would continue to lend each other money. In terms of actual money, while large, $700 billion isn't that big compared to the freight train that is the U.S. economy.

As the heat was raised on Capital Hill, the politicians did what politicians do. They argued, postured, ranted, and all the while pledging not to sign the emergency measure. Being naive citizens we all thought that when it came down to the vote they would do what actually needed to be done and pass the measure. Amazingly, both political parties decided that their political ass was more important than actually doing what needed to be done. The consequence? On Sept. 29th, Congress voted down the bailout. As the vote was being read live on CNBC, the stock market started to fall. Well, fall of a cliff into a black hole is probably a better visual. The market plunged 778 points. As one commentator put it "They voted it down? These guys don't know what they are doing!"

Back to our current story. Everyone, and I mean every person in every country on our planet needs to be clenching just a little bit right now. The U.S. has over 2 trillion dollars in debt to other countries. If the U.S. were to default on those obligations, the domino effect would be cataclysmic. Everyone knows that it has to be raised but the idiots in Washington are doing what they always do, politicizing something that has to be done immediately. Raising of the debt limit needs to happen or the financial crisis of '08 that has led to 3 years of global economic downturn would be analogous to a bird shitting on your roof compared to the 50 megaton bomb devastation that will occur if the limit isn't raised.