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Daniel Dicker

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Economic Wounds of the Debt Debate Won't Heal Quickly

Posted: 08/01/11 04:24 PM ET

The weekend's debt compromise hasn't done a thing to cool my boiling anger.

I'm still steaming mad, because I lost a lot of money last week and so did you, and it was entirely unnecessary. And I have news for you, if you have a retirement account in any of the capital markets right now: some of that money you lost isn't coming back to you -- ever. That's because Washington last week made what was previously unthinkable -- default on US sovereign debt -- suddenly thinkable.

I'm not going to get into the political blame game, because nobody's listening and nobody cares anymore. But here's where we are: In the midst of a weak recovery, with QE2 and stimulus effects coming to an end -- the US Congress chose this very delicate moment to call into question the ability of the United States to pay the debts it has already racked up. Like a fighter who is receiving blow after blow from a formidable opponent, we watched that fighter, in the midst of battle, turn his gloves upon himself and add to the fusillade. Crazy.

And costly. Don't be fooled by the 10-year that has in fact rallied a bit in the face of an imminent default. And don't think that the injury has only been sustained by stocks, down almost 600 points in 5 days. Have a look at repo rates, up at 5-month highs as treasuries move in the opposite direction. Looks at a CMBS market, again nearly frozen by uncertainty. Look at some of the third parties questioning the integrity of treasuries, like the CME, now charging a .5% haircut on using them as cash-equivalent margin instruments. And yes, definitely look at oil -- unwilling to go lower despite pathetic GDP numbers as it attracts a new layer of money seeking hard asset diversity from capital instruments now open to new, self-inflicted pressures.

I expect some of these wounds to heal, but not all. Like a knife slash, we can cauterize and stitch up the cut, stopping the bleeding -- but we still have to wait to find out just how deep and lasting the scar that forms will be.

In oil, I expect that scar to express itself with a higher price. And I expect that price to be sticky, long lasting and a very challenging headwind to overcome for our economy in the short and medium term. And we did it all to ourselves.

Five billion words will be written today assessing the deal and who comes out on top politically and whether this 'compromise' fixes anything. We'll hear economic views on the continuing recovery and what this deal means for it and we'll get hundreds of opinions on whether this deal represents the right, or wrong road to go down.

From others, you'll get your usual recommendations on what stocks to buy and sell, and you'll get that again from me, starting in my next column.

But not today. Today I'm just mad, because we all took an enormous hit last week for no reason and even worse, I'm guessing that we're not about to get it back anytime soon.

 
 
 

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