How Will Huge Federal Budget Cuts Affect Your Investments?

     The Federal budget deficit is a problem that has been hidden until the elections. In October the debt ceiling may be reached and perhaps the Treasury can manipulate payments to hold off default until after the election, giving Congress time to pass emergency legislation. Then at year end the mandatory sequestration law takes effect and huge, gigantic budget cuts will occur.

   One possible outcome would be for republicans to accept huge defense budget cuts and authorize withdrawal of U.S. forces from overseas and less military equipment, etc. The effect of the US. becoming isolationist is that it would make Third World countries admire us more and they would be more willing to authorize American companies to work in their country. Also a U.S. withdrawal could cause political instability that would create more talented, affluent refugees. This would make the U.S. more attractive as a safe haven for one’s residence and capital compared to some shaky dangerous small country that had suffered from instability. This could lower the cost of capital for the U.S. in addition to the effect of the deflationary aspects of huge budget cutbacks.

   As investors scramble to sell “safe” stocks that serve the defense industry and buy treasuries this will tip things over in the stock market towards another stock bear market and bond bull market. During the emergency last minute Congressional debates about this the markets may suffer wild convulsions but eventually things will be better. If the sequestration actually occurs it could be like when Margaret Thatcher stood up against striking miners or Ronald Reagan said to striking air traffic controllers “You’re fired!” It would be scary but things will improve.

 

     I wrote an article “Deleveraging to continue” and “Congress budget deadline nears-crisis looming”.

   Investors should seek independent financial advice.

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