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Paying off the Debt

John Lothian John Lothian - John Lothian News Publisher

One of the sound bites that I hear, including from people like the caustic ex-patriot Jim Rogers, is that the US will never be able to pay off its debt. They never should pay it all off. It would be nice for them to be able to get back to the place where they are not creating more or as much debt, but first things first.

The debt of the United States, backed by the taxing powers of the strongest economy in the world, is something that has been around since the start of the republic. It is something that should be around as long as the republic stands. It is a vibrant and necessary part of the success of the US economy. It is a vibrant and necessary part of the global economy. US Treasuries are the most liquid and deep market in the world. Yes, there is a lot of it, but it is the most liquid of investment instruments.  It is an important store of wealth for many individuals, companies and nations.

On the other side of that debt is the assurance that the debt holders will get paid. This allows companies, individuals and other organizations including foreign nations to invest with the sure knowledge they will receive their principle back. It is a sure thing, thus the historic AAA rating.

Investments need sure things. That is why T-Bills have always been assumed to be a risk free investment. The government can always pay the instruments off either by borrowing from others, and rolling the debt forward, or by printing the money as a last resort.

The gold market seems to think we are nearing that last resort. I have only been to Dick’s Last Resort and I and the only gold I saw there was a Molsen.

Yesterday I took out a paragraph I wrote in my commentary about how I expected the market to move more than expected. In the past, the market have sent messages to the President or Congress about their boneheaded moves. When Congress rejected TARP the first time, it took the markets to send a message that Congress needed to do better. Congress needed to heed the market. I have seen this too many times.

Some members of this Congress were very outspoken in their opposition to raising the debt ceiling under any circumstances. Some said they hoped the U.S. would default. In fact, US Representative and Republican Presidential candidate Ron Paul said, “I have never voted to raise the debt ceiling, and I never will.” Likewise, another Tea Party favorite and Republican Presidential Candidate, Michele Bachmann said, “I won’t vote to raise the debt ceiling.” It seemed too many of the Tea Party backed Congressmen had that same intransigence.

What I wrote, and self-edited out, was that I expected the markets would move farther than they might have in other time in order to affect a change of heart by those in power because of the inelasticity of political positions of this group of Congressmen. Yesterday, the CBOE’s VIX index, sometimes called the fear index, jumped 50%. If you don’t know how to trade volatility, you should learn how. The record volumes on the CBOE are testament to the value of VIX trading.

If my theory is correct, the volatility and severity of the market moves will be shocking. More shocking than they have been so far. They need to be so shocking as to make Democrats and Republican work together (think dogs and cats getting along). The basis for the theory is not a political judgment, but a market one based on algebra.  If you have a constant in an equation that will not change, then you need to move the other variables more.

We had a nagging debt problem. Now we have an acute market problem. I would hope that Congress would come back into session sooner than later and take a fresh look at their recent work and see if they can’t do better a second time.

We don’t need to pay off the debt. We need to re-establish certainty and trust.  The President should perhaps call Congress back into session, but the markets may well just do it for him.

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Lothian is executive chairman and CEO of John J. Lothian & Co. and editor of the John Lothian Newsletter. He publishes,,, and three industry newsletters.