US Debt Ceiling; How will it affect value of the US Dollar

Posted on July 29, 2011

Do you remember the short story “The Lady or the Tiger” written by Frank Stockton in 1882? It’s a fable about an accused individual having to select one of two doors. Behind one of the doors was a beautiful Lady who would make the person happy and take care of him for the rest of their lives. Behind the identical other door waited a hungry and ferocious tiger that would slaughter and tear the person to pieces.

The United States Congress is the “Body” standing in front of the two doors, and the world is waiting and watching to see which door is selected. The Lady behind one of the doors represents the end of uncertainty and drama with this particular political brawl. In this scenario ,comfort and stability return to the US treasury bond markets. Foreign governments, global investors, and speculators will be assured that the the U.S. Government can and will pay its’ obligations. Interest rates for now, will remain low slightly aiding our weak economic recovery. And at least for the moment, world stock markets can return to focus on financial fundamentals instead of clashing partisan headlines.

However, if the US Congress chooses the door with the Tiger, (Default) the consequences can be devastating. Not only will the tiger eat our lunch, but the creditability of the United States will be tarnished for a very long time, if not forever. If the US defaulted once, then why not again? This is a door that once opened, cannot be closed. Interest rates in the US will rise, the value of our homes will fall, our cost of living will go up, and our slow employment recovery will fail. Our reputation as the world’s safe harbor will be tainted.
The international markets already know that the global economy can survive without the US dollar being the world’s reserve currency. The US dollar is weak and will continue to fall against newly annointed safe haven currencies. Even the “Kiwi”, the New Zealand currency is at a 40 year high against the dollar, and is a preferred destination for capital investment.

The major difference in this parody is that the US Congress knows behind which door the Tiger awaits its’ prey

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