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The Circus is in Town

by | published July 29th, 2011

Marina and I have not gone to the circus in years, so I thought this weekend it would make an interesting change.

We're driving down to D.C. for the show.

There, a highly publicized two-and-a-half ring affair is underway.

Not a full three-ring circus, you see, because, while it may include one president and two branches of Congress, the venerable Speaker of the House cannot herd all his cats (as former U.S. Senator Trent Lott used to put it). Some elephants, it appears, have left the tent.

All week, I have been fielding incredulous phone calls from foreign colleagues who are mystified by the conduct in Washington. I did a round of media interviews and talk shows today on the relationship between the debt crisis and oil (more on that in a moment), and one theme prevails, both here and abroad…

How can elected officials be this stupid?

What we have is a crusade masked as a political debate. What we are likely to get is a result that will cost us far more than programs certain people want cut.

There is a time and a place for the hardnosed discussion we need to have on restructuring spending, the tax system, government priorities, and national objectives.

But holding disabled veterans, social security recipients, those dependent on Medicare and Medicaid, and the unemployed still looking for jobs hostage – in an ideological joust – is not the way to do it. When the ax comes to entitlement checks after August 2, these are the people hit first and hit hardest.

This is not a haircut. It is a decapitation.

It Is Already Impacting the Energy Sector

Prices of both commodities and companies are broadly lower (save for some electricity producers benefiting from the stifling heat).

But it is the relationship between the unfolding debt unease and anticipated lowering of demand that is really weighing heavily on the market.

If Tuesday comes, and the clowns in Washington still have not passed a debt extension, we are in uncharted waters. It will be the most embarrassing moment thinkable for America and its cherished private market system.

The former will start defaulting on its obligations, while the latter will begin to malfunction. Credit will dry up, a movement out of the recession will end, massive asset erosion will begin, and the value of the dollar will depreciate significantly.

There will be major problems (once again) in stock exchanges worldwide, in the ability of clearinghouses to handle trades and executions, with banks cutting available credit, with rising interest rates on credit cards and revolving charge accounts.

For the first time, however, this will have been created, not by a sub-prime mortgage bubble, an investment banking collapse, or a geopolitical event… but by government inaction.

The assumption is that all of this will hit economic recovery hard, and the demand for energy (especially oil) will go south right along with it.

Thus far, markets in general and energy in particular have acted as if there will be a resolution. The worry, however, has been increasing – witnessed by the slides in share values toward the end of trading sessions (reversing what we had normally seen recently, even on bad trading days).

Nobody really knows how much the contraction will be or how quickly and pervasively it will emerge. But those who believe it is a ruse, or not serious, simply have no clue how credit and markets operate.

So let me put this as clearly and simply as I can.

When a government defaults on its debt, the entire investment and commercial banking system becomes subject to a massive downward spiral. That will impact every business financing, mortgage, car loan, student loan, and investment package out there.

Yes, in the process, demand for oil products will begin declining. That should mean gasoline prices will also drop. Nice for the average consumer out there, now tooling around in the family SUV much more infrequently.

Yet it comes at a cruel price.

The average guy can afford to fill up his tank again. Unfortunately, when he gets in his car, he may no longer have a job to drive to.

This one is not the result of Saudi Arabia, OPEC, Iran, a hurricane, a mortgage bubble, terrorists or consumer confidence. This one rests entirely on the stupidity of people we elected.

Hell of a show, guys.

Sincerely,

Kent

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  1. kelly cranston
    July 29th, 2011 at 23:37 | #1

    Couldn’t have said it better myself. Thanks again for your insightful message.

  2. Dom Brunone
    July 30th, 2011 at 13:57 | #2

    Kent- I expected better from you. The US govt takes in almost $200 billion/month in tax revenue. Do the math, professor.

    Pay interest on our debt, plus social security, medicare, veterans & active military pay, and you still have plenty left over for other things. There is ZERO reason to default unless Obama wants to stick it to granny to prove a point. Oh, yeh, the EPA and the FDA might not get paid…too bad…small price to pay, and I for one, will be rejoicing when they get cut off…the debt must stop here.

    Paid Up Subscriber to The Energy Advantage

  3. Levis Levongo
    August 6th, 2011 at 21:52 | #3

    Professor i am very impressed.
    but i have a question, With how much dollar will i start buy shares overseas like America?????

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