The United States has plenty of cash flow to cover its current debt service costs and President Obama does not want to be remembered as the president who defaulted on America's debt obligations. A default will not happen unless Obama wants it to. It is entirely within the Treasury's capability to prioritize payments, all fear mongering aside.
The real issue is our long-term solvency. Long-term economic stability can only be achieved by living within our means. We still are running almost a trillion dollar deficit. That is unsustainable and any rational, intellectually honest person knows it.
What the markets value is stability. Yes there is volatility because of the uncertainty of these negotiations, but in the long run the markets will get what they want. Deficit spending will be curtailed further, and little by little, America will make progress on getting her financial house in order.
I predict there will even be changes to Obamacare, however small, in whatever final budget agreement materializes. This will be a good thing because we cannot afford the unfunded liabilities mandated by the Affordable Care Act. The United States will not default on its debt due to the government shutdown, but will eventually default if Obamacare is allowed to continue in its current form — think Argentina. We just don't have the money.
What is the alternative to the current situation? If we don't reign in our deficit spending, interest rates will spike as our debt load increases to unmanageable proportions. This is what the market is really worried about. If the markets were worried about a default, I guarantee you the 10-year note would not be below 3 percent.
So buy this dip, and look for a rally across the board when these negotiations conclude.
Todd Wood is a graduate of the U.S. Air Force Academy. He has been an aeronautical engineer and a special operations helicopter pilot for the USAF flying counterterrorism missions globally. After a long career on Wall Street, he left a seat on an emerging market debt capital markets desk to write. His first thriller novel, Currency, was published in late 2011 and deals with the national security consequences of our sovereign debt. His follow-on novels deal with issues that are material to our nation's future.
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