debt ceiling

The Debt ceiling will be reached in only five days. We do not like to gloat, but this coming event was incredibly obvious. We pointed this out to our readers several weeks ago, in an article titled Forget Fiscal Cliff, A Much Bigger Problem Lies Weeks Ahead. It made no sense to us why the media was only focused on the fiscal cliff and not the more serious issue of the debt ceiling, but we knew eventually the media would HAVE to report on it, because the ceiling would eventually be reached.

Just several hours ago, Treasury Secretary Timothy Geithner sent a letter to Congress stating that  hit the $16.4 trillion debt ceiling  would be reached on December 31st, 2012. If the debt ceiling is not raised within the next five days, Geithner warns that “extraordinary measures” would allow the US to save $200 billion a month. However, since the Treasury borrows $100 billion a month, this only buys two months.

Additionally, the damage has already been done. We think that rating agencies actions are worthless, but many investors disagree. Last year,  Standard & Poor’s lowered the USA’s debt rating because “the differences between political parties have proven to be extraordinarily difficult to bridge.” Using this logic, another downgrade seems extremely likely. We pointed out some of the big issues related to the debt ceiling, however, we expect the media to start picking up on this story shortly and providing further details.

There is a lesson for investors here as well. The media (and we are certainly guilty) tend to focus on the wrong issues. Many times the reason is that news networks want stories which generate interest, not which ones they consider to be the most important. However, other times the media just totally misses the boat. The past few months have been a perfect example. There was an obsession with the fiscal cliff and close to no discussion of the debt ceiling, despite the later being a far bigger problem. Without further to do, Timothy Geithner’s letter to congress is embedded below:

Sec Geithner LETTER 12-26-2012 Debt Limit