DaveIf you watch the Stock Market, (even I do) it appears there is no consternation over whether or not the debt ceiling will be raised in the weeks ahead.  By some reports, it is estimated that we will bounce off our current debt ceiling sometime between early April and late May. That means a deal has to be struck fairly soon.  We're cutting it a little close.

The debate has begun with some heavyweights weighing in.  Tim Pawlenty, former governor of Minnesota and suspected 2012 Presidential Candidate, says we need to vote down the raising of the debt ceiling in favor of passing legislation that would allow us to pay interest and debt first and then pay other creditors as tax revenue flows in.  

I'm scratching my Head on that one as interest alone on debt is nearly half the budget the way it is.  And half the budget is about what comes in if we don't operate at a deficit.  Now, being from Minnesota, I like Pawlenty and believe he is very fiscally responsible. But if this is the best option we have, short of raising the debt ceiling, we got a problem.

I don't think people get it.  Certainly not the markets.  I wondered what would happen if we do not raise the debt ceiling.  In answer to that query, I found this scary little bit from, Scott Silva, The One-Handed Economist. . .

The effects of a negative outlook report or credit downgrade of US sovereign debt would be devastating. The floor would drop out of the US bond market. US interest rates would spike, sending a shockwave through the stock market. Massive Wall Street sell-offs would spread to equity markets around the world. Retirement accounts would be washed out. Real estate values would plummet. GDP would grind to a halt and unemployment would reach or exceed Great Depression levels. The US Dollar would collapse and ultimately succumb to a de facto new reserve currency, perhaps the BRIC Bancor, the UN Special Drawing Rights established by Russia, China, India and Brazil. The United States would relinquish its role as the strongest economy on the globe, and join the ranks of fallen empires.

It is for this reason that I believe the debt ceiling will be raised.  I cannot imagine being just a few weeks away from the end of civilization in the U.S..  So far we have gotten away with printing money and monetizing debt.  Damage to the dollar has been minimal, at least in terms of other currencies who are also falling apart.  And, the last time we announced we were printing money to buy bonds, the stock market went up.

So why not raise the debt ceiling?  Let's keep kicking the can down the road.  An image comes to mind when I say that.  Some time ago, I visited the Pacific Palisades after mudslides devastated the ocean view neighborhood.  As I peered through the fence around the front yard, my eyes followed the sidewalk that once led to the front door.  And then ---- no door!  No nothing!  The house had fallen down the side of the hill onto the PCH.

I think that's what's going to happen to our debt ceiling.  We're going to keep kicking the can down the road for as long as we can see the road and the can ahead.  Then all of a sudden -  Oooops!  No more road!  I imagine it was like coming home to that house in the Palisades one day and going Oooops!  No more front door.

That said, the debt ceiling will likely be raised and then the other good news.  Inflation which is growing, right now, faster than mold in a foreclosed house, will explode.  In my opinion there is no escape, only delay.  The measly cuts being proposed, of $400 billion over the next decade, is like bailing the Titanic with a thimble.  I'm sorry, but it just doesn't add up.  We need something much bigger.

Someone asked me the other day what it would take to settle down the debt issue and get back to business.  I said a $25,000 an ounce gold price would go a long way to collateralizing our outstanding debt. 

That would make our gold reserves worth about $7.5 trillion.  I think that would help.  Don't you?