Flirting with Disaster

In case you haven’t kept up with current events, there is a significant risk on the horizon that could severely impact the U.S. economy.

Unlike a global pandemic that started on the other side of the world or a CAT4 hurricane that pummels the Gulf Coast, this risk is completely man-made and is entirely avoidable. Unfortunately, due to the hyper-partisan nature of our current political environment, our elected leaders in Washington are about to drive the U.S. (and with it the global) economy right off a cliff.

Since the end of World War II and the 1944 Bretton-Woods Agreement, the U.S. dollar has maintained the position as the apex predator of currencies. Just about everything that is sold across the globe is quoted in the U.S. dollar (USD) – with special emphasis on petroleum. With this privilege comes the advantage that when US companies want to buy goods or commodities from overseas, they don’t have to worry about currency risk. Remove that special status and all bets are off.

Let me be crystal clear – if the US ends up defaulting on its debt obligations at the end of the month, this would easily be one of the biggest and dumbest self-made economic disasters in the history of the modern world. You think Brexit was a bad idea? You haven't seen anything yet!

Biggest Own-Goal in Economic History

For the past 80 years, the US economy has sat atop the global economy. Along the way other countries have tried to supplant the US economy and the US dollar from its perch (e.g., the Japanese yen, the EU euro, etc.) but none have succeeded.

There is a plethora of reasons why this never happened, but one bedrock has been this:

In the modern era, the U.S. government has NEVER defaulted on its debt obligations.

However, once this happens the damage will be done. Global investors will think twice before buying U.S. Treasuries and will give the yen, the Euro, and now the Chinese renminbi serious consideration.

Where in the past there was no doubt since the Americans (like the Lannisters) always paid their debts, going forward there will be doubt. With doubt comes the need for an investor to be compensated for that debt.

How do they get compensated for that higher debt?

You pay them a higher interest rate – until you can eliminate that doubt of defaulting again. Doubt this logic? Go talk to Argentina.

What Would a Default Look Like?

So, what would happen if the U.S. defaulted? Well, based on some insights from some very smart people it would be in one word – catastrophic!

Specifically, as reported by NerdWallet, “A report from the White House Council of Economic Advisors in October 2021 warned of the possible effects of the U.S. defaulting, which include a worldwide recession, worldwide frozen credit markets, plunging stock markets and mass worldwide layoffs. The real gross domestic product, or GDP, could also fall to levels not seen since the Great Recession.”

The article goes on to state that a host of issues would develop which would include:

• A sell-off of U.S. debt
• Money market funds could see volatility.
• Federal benefits would be suspended (e.g., Social Security, Medicare, and Medicaid, etc.)
• Stock markets would plummet.

That bad enough for you?

If not, I’ve got some wonderful projections from Zillow to share with you on how the domestic real estate markets will react. Look at this:

Interest rates would rise – Since the U.S. Treasury Bill would no longer be considered a “risk-free” asset and as such its interest rate could no longer be seen as a guarantee, then the markets would require a higher rate of return to attract investors. In essence, the U.S. would need to pay a higher interest rate to entice investors to give up their capital.

So, in this case, since mortgage rates are higher than a U.S. Treasury rate with similar duration (since a residential mortgage is a riskier investment than a U.S. Treasury) it requires a higher rate of return to attract investors. Therefore. you can expect ALL new mortgage rates to go up.

Unemployment will increase – So if the U.S. government isn’t allowed to spend more than it takes in, it will need to slash spending. Such a dramatic cut “would necessitate furloughs among federal and state employees, and likely trigger waves of layoffs at contractors and other employers more indirectly connected to federal spending.”

Also, with rising interest rates economic activity is certain to slow down (since if things are more expensive to finance, buyers may become gun shy and curtail their spending), private sector jobs may get cut - especially in manufacturing and construction. Also under such a scenario, consumer confidence is likely to drop like a lock a rock which can drive overall economic activity in a downward spiral.

Housing Sales and Values to Drop – Now this is easy to see playing out based on higher mortgage rates. As we all know, the lower the interest rate on a mortgage the more you can afford. So, when you take the same data inputs in a mortgage calculator, and you plug in a higher interest rate than the mortgage payment increases. So, in an environment where fewer people have jobs and fewer people can qualify for a loan, then fewer people will be looking to buy homes.

Consequently, if a seller wants to unload a property and rates are higher and buyers are fewer, then there is only one option to increase the odds of selling the asset – cut the selling price!

Think again of a simple mortgage calculator. If a buyer can only afford to pay X at a given interest rate, then the price needs to come down when the interest rates go up. Under a default scenario, this push-pull on rates vs. values will apply across the entire country.

Why?

Because again the rate of a 30-year U.S. Treasury will set the basis for ALL new mortgages across the country.

Here Comes My H.P.O. (Hot Political Opinion)

So, unless you want your retirement savings to collapse, your Social Security (or your parent’s) checks to stop, and the U.S. economy to plummet (along with your home’s value), do you and your country a favor and let your opinion be known.

Write or call your representative in the U.S. House or Senate and let them know that defaulting on our obligations is not an option.

There is way too much at stake.?

Et al...

Review: Guardians of the Galaxy: Vol. 3

As the calendar has turned to May, the unofficial start of summer is just around the corner – Memorial Day!

With it comes the busy summer travel season (Disney World anyone? Maybe Europe?) and the season of summer blockbuster movies. I for one am geeking out to see Michael Keaton as Batman again in the upcoming “The Flash” movie. Of course, there will be a new Fast & Furious movie (full disclosure – I’ve never seen one of these films from beginning to end and never in the movie theater) as well as a new Transformers (I really liked the first one, but every film since has been nothing but a downward slide in enjoyment).

All this being said, Marvel Studios (speaking of Disney World) has rolled out its latest Marvel Cinematic Universe (MCU) film “Guardians of the Galaxy: Vol. 3”. This film is in fact the 34th film in this film series since the original “Iron Man” was released in 2008.

Man, I feel old!

Now, we all know “The Avengers: Endgame” made a ton of money. However, since this film was released, the post-Endgame MCU movies have been a mixed bag:

• Shang-Chi – great!
• Black Panther – ok, kind of depressing and heavy, but still a well-made movie
• Eternals – Oh, dear God who signed off on this!

Now, GOTG3 is in the theaters trying to get back some of the Disney-magic and get some momentum going in the MCU.

And the Verdict Is…

Pretty simple formula here.

If you enjoyed the first two GOTG films, you will truly enjoy this film. It has a lot of the same action and comedic banter between the main characters they you are used to, and of course a fun soundtrack full of some classic songs. (Would you like a serving of Beastie Boys with your popcorn?) In addition, it will pull at your heart strings as we get deeper into Rocket’s backstory.

Warning: If the idea of doing testing on animals makes you uncomfortable you may want to think twice

This is a summer blockbuster, so it needs to be seen in a nice, large theater with great sound and video projection. Pay for the good seats at a theater near you.

Treat yourself!

If you enjoy what you've read here and you think I might have a clue what I'm talking about, then please reach out to me if you would like me to present to your firm or organization. I have experience talking to professional organizations, trade conferences, as well as universities. I've also appeared in newspaper articles and podcasts. Also, I'm available for birthdays and bar mitzvahs.