Debt Ceiling Reached; Now What?

As the debt ceiling passes $14.29 trillion today, investors and world credit agencies expressed deep concerns that the US could end up in default as they seemingly head down the same path as Greece.

This just in: Debt Ceiling Reached today!

The scenario is not good for an US recovery. With the United States running a $1.6 trillion national deficit this year and over $113 trillion in future unfunded national commitments, economic conditions are worsening rapidly. With unemployment back up over 9% and inflation moving up to an annualized 3.8% basis, could we be setting the stage for future stagflation?

"Bankers and business executives warned lawmakers that default could trigger a financial crisis, sending interest rates soaring, which would make it harder for families and businesses to borrow. That's because a default would throw into question the value of U.S. Treasury securities, long considered one of the world's safest investments. Many loans and business deals are based on the value of Treasurys, and if their value eroded the impact would be felt broadly."

But what about stagflation? Stagflation is an economic term, broadly known in business circles during the late seventies when the US economy experienced both double-digit unemployment & inflation simultaneously. With the Federal Reserve continuing to print money under the auspices of QE or quantitative easing, oil prices are already up 19% over last year and a record deficit this year, stagflation could be on the horizon.

Debt Ceiling = stagflation?

Economists agree stagflation would be devastating to consumers and businesses alike. In March, the Consumer Price Index (CPI), which measures the average change in prices of goods and services over time, rose 0.5 percent. Over the past year, the CPI has risen 2.7 percent, driven primarily by energy and food prices.

The CPI's gasoline index rose 5.6 percent in March and has increased 14.4 percent over the last three months. That increase has contributed to higher prices at the gas pump. The national average price of regular unleaded gasoline is $3.96, up 32 cents from a month ago, and $1.07 from a year ago, according to AAA

CPI is a lagging economic indicator when it comes to inflation. The Producer Price Index (PPI) which measures inflation at the wholesale level was up to 6.6% on an annualized basis in May. Broken down farther, PPI for crude materials is up to 23% on an annualized basis.

The FED continues to down-play the impact of inflation as they address it in terms of core inflation as opposed to total inflation. And while this may play in uneducated circles, educated investors and global markets are deeply concerned.

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