Fiscal Cliff, Sequester, Debt-Ceiling… Oh My!

Fiscal Cliff, Sequester, Debt-Ceiling… Oh My!
April 18, 2013 Market Traders Institute

FX Jazz, Analyst on Demand Host

Just when you think it’s all going to come to an end – it starts back up again. I’m talking, of course, about the U.S. economy and more specifically, the inability of Congress to find consensus on, well, anything. This constant bickering and political football playing is all well and good, except for the fact that time is ticking. And while President Obama and Congress have successfully slapped a Band-Aid on what I refer to as “gunshot wounds,” eventually the Band-Aids will fail and the problems will require proper fixes.

Remember the debt ceiling crisis back in August 2011? The United States hit its statutory debt limit and, at the request of the President, that limit or ceiling was raised. Problem solved, right? Wrong. The fact that these limits continue to get hit, even after they are raised, points us to the presence of a larger problem here – extreme spending. The United States has a chronic spending problem and unless things change, we face further consequences to the economy and to the U.S. dollar.

According to Fitch Ratings Limited, “The U.S. ‘AAA’ status is underpinned by the country’s relative economic dynamism and potential, diminishing financial sector risks, respect for the rule of law and property rights, as well as the exceptional financing flexibility that accrues from the global benchmark status of U.S. Treasury securities and the dollar. These fundamental credit strengths are being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt. In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current negative outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt crisis is averted.”

So what happens if the U.S. does experience another downgrade? Well, naturally the dollar will fall in value. As an American, I’m not really pleased about that. As a Forex trader, I’m preparing for potential opportunities to short the market. There is one concern here, though – it would hurt us not to forget the fact that virtually the rest of the world is in financial turmoil as well.

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