Earnings Versus Debt Default

The news this past week was on the national debt and the threat of default, as virtually everyone in the world knows. What a mess, it has more drama than many movies. You can not make up stuff this dramatic. So this past week when the news was on the threat of default, stock markets around the world went up. What was not reported this week was that corporate earnings are better than anticipated by about 3% so far this quarter.

This week the tug of war between earnings and default was won by earnings. The reason is that our leaders are all saying the right things taking the threat of default off of the table. It is kind of like a dream that I had years ago, something bad was in a room and I was the only one that saw it, perhaps you have had a similar dream. In this dream I told people about it and nobody listened and then I awoke unharmed. This default issue is like this bad thing in the room that everyone is trying to ignore and I want to wake up in about 10 days unharmed.

First is the weekly update from Vanguard. At the end is a list of organizations in the U.S. that have people who are trying to influence tax law. In the middle is my view of why we will not have a default.

Vanguard

The scorching heat wave that set record temperatures across much of the nation didn't extend to the economy, which remains tepid at best according to the latest readings. There was a rise in the Conference Board's index of leading economic indicators and a bump in new residential construction. However, existing-home sales dropped for the third straight month as President Barack Obama and congressional leaders continued to negotiate over an increase in the nation's debt limit. For the week ending July 22, the S&P 500 Index rose 2.2% to 1,345 (for a year-to-date total—including price change plus dividends—return of about 8.1%). The yield on the 10-year U.S. Treasury note rose 5 basis points to 2.99% (for a year-to-date decrease of 31 basis points).

Reasons Why We Will Not Have a Default

1) We can not afford it - an increase in interest rates also increases the national debt because it increases the interest payment.
2) We have a bigger budget deficit because the Federal Reserve loses money - the monetary gains from the Federal Reserve go into the Treasury, about $78 Billion last year if my memory is correct, and so do the monetary loses. The Fed has $1.6 Trillion in U.S. Treasury bonds on their balance sheet and a default would result in a loss if these bonds are sold early.
3) The real financial power brokers have lots of people behind the scene are influencing our representatives, Treasury Secretary Tim Geitner and Federal Reserve Chair Ben Bernanke.
4) It would be political suicide for the party believed to be responsible for a default. Quite frankly, I think our politicians only really care about this point.
5) We have an election every 2 years and politicians want to get re-elected.

So what happens is something we can all speculate. My view is that a default is avoided. The Republican party wants this topic to continue until the 2012 election so I anticipate that a short term solution will be implemented. I think that the discussion on the national debt will be with us through the elections in 2012.

Here is the political quote of the day - Never Let a Good Crisis Go To Waste

In the tug of war between earnings and debt default focus on earnings.

U.S. Organizations Concerning Taxation

Americans for Responsible Taxes
Americans For Fair Taxation
Americans for Tax Reform
The Chartered Institute of Taxation
Citizens for an Alternative Tax System
Citizens for Tax Justice
Henry George Foundation of America
Kill Your Taxes
National Taxpayers Union
Tax Foundation

So we are paying taxes to support organizations concerning taxes, sounds like a conflict of interest because if the tax issue went away these people would not have a job. No wonder we have problems resolving taxes, we have too many cooks in the kitchen. Enjoy the good things of life!!!