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David Frazier: Debt 'Default' is Only Political Scare Tactic

By Forrest Jones and Kathleen Walter   |   Monday, 25 Jul 2011 11:36 AM

Talk that a government default will lead to financial Armageddon is nothing more than a tactic designed to scare Americans into supporting an ill-informed political agenda, says Newsmax Senior Market Strategist David Frazier.

The government has said it could default on its debts by Aug. 2 if Congress doesn't lift its $14.3 trillion debt limit.

Administration officials have said default would be catastrophic and throw the country into a financial Armageddon should it occur.

That's not going to happen, Frazier tells Newsmax.TV.

Story continues below video.



"It's nothing more than a scare tactic," Frazier says. "There is no chance of a default on Aug. 3 if the U.S. Congress does not raise the debt ceiling. If they do not at some point find ways to cut expenditures and to raise revenues, then the U.S. could possibly default at some point a year from now, six months from now or nine months from now. But on Aug. 3, it's not going to happen. It's nothing more than a scare tactic."

Such fear mongers are simply misinformed or are acting dishonestly.

"They're either very poorly informed, or they're simply lying to the American public," he said.

Talks between the White House and Congressional Democrats and Republicans have repeatedly broken down over raising the ceiling, with both parties saying they want to avoid default but differ over ways to narrow deficits in the process.

Republicans oppose certain tax hikes, while Democrats oppose certain spending cuts.

While default is unlikely, don't expect Wall Street to remain cool, calm and dismissive if Aug. 2 rolls around without a deal.

There will likely be a selloff, Frazier says.
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"If the debt ceiling is not raised on Aug. 2 you're going to probably see a lot of panic, a lot of fear, and there's going to be a lot of pressure on stocks — let's use the Dow Jones Industrial Average as a benchmark: it wouldn't surprise me if the Dow might fall anywhere between 200 and 700 points if the debt ceiling is not raised," Frazier says.

Look for the silver lining in that selloff.

"If that were to happen, I would urge very strongly to anyone who has investments in the stock market to wait to see signs of a turn and to buy aggressively, because through my research and just monitoring what's going on, I think we are probably going to see something happen shortly after Aug. 2 if not on Aug. 2," Frazier says.

"This would create a huge buying opportunity if we were to see a big selloff."

Credit ratings agencies have said the country could lose its AAA ratings if it defaults.

That would be bad, Frazier says, but it's not likely either.

Inflation Overblown

Also unlikely are fears that inflation is going to gallop out of control and wreak havoc on markets, sending panicked investors fleeing to gold for safety.

High food and gasoline prices have helped pump up inflation rates this year, but those pressures are temporary and should subside as the year unfolds and bring overall headline inflation down with them.

"The research that I do strongly indicates that inflation rates here in the United States will decline during the second half of this year, and that food costs are going to come down," Frazier says.

"They're not going to come down dramatically and nor are inflation rates, but there's a lot of indication that we are going to see food prices come down a bit and inflation rates in general come down somewhat."

When inflation rates rise, the U.S. dollar often weakens, which makes gold a very attractive hedge.

Gold prices have been rising in recent years, especially in wake of stimulus programs carried out by the Federal Reserve and the Obama administration that have pumped trillions of dollars into the economy with the aim of sparking investment and ultimately, growth and jobs.

Gold prices recently broke records, spiking to over $1,600 an ounce.

With inflation not as big of a threat to the U.S. economy as many think, and with too many people invested in gold in the first place, the time to look at the precious metal with some degree of skepticism is now, Frazier says.

"The price of gold rose substantially during the past year or year and a half because people have been led to believe that we are going to have very high inflation rates here in the United States, that we are supposedly going to get into a hyperinflationary environment where prices of a broad basket of goods double in price if not every year are up 10 percent month after month after month," Frazier says.

"There's no evidence whatsoever or there's no indication that's going to happen. It's just the opposite."

So play it safe, and invest in lackluster but predictable venues.

"I urge people to keep a good portion of their overall financial-market assets in cash-like securities, in money market securities, in short-term CDs. I know you're making almost no interest on those securities, but at least you're not losing money, so we need to be more cautious at this point in time."

Treasury Secretary Timothy Geithner has warned of an economic "catastrophe" if the debt ceiling is not raised.

Other White House officials have made similarly bleak forecasts as well.

"Notwithstanding the voices of a few who are willing play with Armageddon, responsible leaders in Washington are not," Obama's Budget Director Jack Lew told ABC's "This Week" recently.

Lawrence Summers, former Treasury Secretary under Bill Clinton, has also expressed concern of failure to lift the ceiling and risk default.

"If we don't do that, it's going to be Lehman on steroids, it's going to be financial Armageddon," Summers told CNBC recently.

Some Republicans have said likewise.

"The debt ceiling is going to be Armageddon," Republican Senator Kay Bailey Hutchison has said, according to Reuters.

About David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.
 

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Talk that a government default will lead to financial Armageddon is nothing more than a tactic designed to scare Americans into supporting an ill-informed political agenda, says Newsmax Senior Market Strategist David Frazier. The government has said it could default on its...
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