Credit Downgrade Nears As U.S. Eyes Default

A battle set up for the end of February could prove even uglier than that just waged on the Fiscal Cliff front, featuring unresolved parts of the deal fused with another and larger crisis over raising the U.S. debt ceiling. Standard & Poor’s became the first of the “Big Three” Credit Ratings agencies to lower the U.S. Credit Rating 18 months ago and now Moody’s along with Fitch Ratings looks ready to do the same. The U.S. Government’s failure to address the escalating long-term national debt and the uncertainty over the delayed sequester cuts are increasing the nations financial problems. The Fiscal Cliff deal did nothing to resolve the escalating spending problem, but in fact the Bush-era Tax cuts have been replaced by new Tax cuts by Obama, which will raise the budget deficit over the next decade by $4 trillion while, paradoxically, also hiking taxes on nearly three quarters of Americans with an emphasis on the wealthiest 1%. Fitch said in a report last month, If the negotiations on the Fiscal Cliff and raising the Debt Ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the U.S. sovereign rating could be subject to review, potentially leading to a negative rating action. This fiasco is exactly what S&P predicted when it downgraded the U.S. credit rating.

U.S. Will Trip On The Debt Ceiling Hurdle
The U.S. Government officially surpassed the $16.4 trillion debt ceiling on Dec. 31 but accounting tricks will keep the government functioning for about two months, through the end of February. That’s when Washington will have to raise the limit or face a repeat of the debt-ceiling crisis the country endured in the summer of 2011. In order to force Democrats to approve more drastic spending cuts, Republicans will threaten to deny raising the U.S. debt ceiling, no matter how high the immediate cost to the U.S. Economy. Some Republicans feel so strongly about getting spending cuts and entitlement reform in the next round of negotiations, they’re willing to live with the consequences of failing to raise the U.S. debt ceiling. The Republicans had begrudgingly agreed to higher tax rates for the wealthy in the Fiscal Cliff deal, so now they will fight harder to get their way with spending cuts by using the debt ceiling issue -- a major economic concern as leverage. President Barack Obama already has warned that using the U.S. debt ceiling is off limits as a negotiation tactic for spending cuts. While I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed, the President said last week. Republicans are also confident they’ll get spending cuts to match any increase in the U.S. debt ceiling. But President Obama is likely to confound the GOP by requesting further tax increases, though in the guise of tax reform. Spending cuts have to go hand in hand with further reforms to our tax code, so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans, President Obama said after he signed the Fiscal Cliff bill. Such a proposal will put Republicans in a tough spot, as they had suggested similar ideas as an alternative to the tax hikes that ultimately made it into the Fiscal Cliff deal. In addition to the risks that failing to raise the U.S. debt ceiling would incur -- mainly, major damage to the country’s creditworthiness -- by way of a credit rating Downgrade. The GOP has to worry that President Obama would use the power of his office to pin all the blame on them for the fallout.

Default Could Happen As Soon As February 15
The U.S. Government may default on its debt in 38 days or as soon as February 15, half a month earlier than widely expected, according to a new analysis adding urgency to the debate over how to raise the federal debt ceiling. The analysis came courtesy of the Bipartisan Policy Center (BPC), which released a revised “debt limit analysis.” If we reach the X Date and Treasury is forced to prioritize payments, handling payments for many important and popular programs will quickly become impossible, causing disruption to an already fragile economic recovery, said Steve Bell, Senior Director of the Economic Policy Project at BPC. The government hit the $16.4 trillion statutory debt limit on Dec. 31, but the Treasury Department is able to undertake a number of accounting schemes to delay when the government runs into funding problems.

The Treasury has said that the accounting schemes, known as “extraordinary measures,” ordinarily would forestall default for about the first two months of the year, though officials were clear that they could not pinpoint a precise date because of an unusual amount of uncertainty around federal finances. If Congress does not raise the debt ceiling by the deadline, the White House has said that the U.S. probably will Default. In a previous episode -- in the summer of 2011 -- officials determined that the best course would be to withhold all of a given day’s federal payments until enough money became available to pay them. The consequences of an immediate 40% cut to government services would be brutal. Practically all government employees would suddenly see their pay checks go to zero. The government would only have enough money to pay Social Security checks and Medicaid providers on certain days. The U.S. defense budget would collapse which could lead to considerable geopolitical uncertainty.

Irrespective of what the outcome of the Debt Ceiling negotiations or fighting may be, one thing that’s sure is that there will be a large scale economic chaos -- Globally. The risk of a U.S. Default next months or sooner and more importantly the appalling U.S. fiscal situation joined by Japan, the UK and many European nations show the importance of having an allocation to a secure safe have investment in a portfolio. With the withdrawal of the U.S. Federal Reserve initiated QE programs, a major support and trigger for gold -- a proven safe haven since the financial crisis began, will simply vanish. What can one rely on now? Practically Nothing! for the longer term, but surely for the medium term, silver Investment seems the only viable alternate, which has also proven to be the highest gainer since Mr. Obama became President.