Obama And Lew Say This Is Serious - Are They Just Grandstanding Or Is This Time Different?

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by: Joseph Stuber

When the markets open Monday we will be entering the 7th day of a government shutdown and we will be just 10 days away from a potential debt default. The assumption is that we won't really take it that far of course as we never have before. We've become used to this game of brinkmanship in recent times and we always resolve the matter at the last minute so why would this time be different?

It may well be different this time and for reasons few take the time to understand. Failure to take the time to understand this high stakes game of "chicken" could be hazardous to your financial health. In my case I felt the need to get as close to understanding the constructs of this malaise as possible and I admit it wasn't that easy nor is it at all clear how this will finally be resolved.

The first question that entered my mind - how in the world have we taken this matter so far in the first place? It is useful to understand the composition of the House of Representatives as a base for getting where we need to go. The House currently has 232 Republicans and 200 Democrats.

Of those 232 Republicans - roughly 175 of them are conservative members of the Republican Study Committee (RSC). That leaves 57 of the Republicans in the moderate camp and likely to side with the Democratic minority in voting for a clean CR (continuing resolution) that the Senate and Obama will accept allowing a continuation of "business as usual" while the matter of the budget and the debt ceiling are dealt with by Congress.

To affirm the stance on this matter as it relates to the RSC here is an excerpt from an article on the RSC's website:

Washington, D.C. - The RSC Steering Committee today unanimously voted to support the latest House proposal to fund the government while protecting American families from the devastating consequences of the President's health care law.

"This bill ensures that all Members of Congress and the White House will finally have to live by the same laws that have been passed, just like all Americans," Scalise said. "Either Obamacare is good enough that it should apply to all or it is so bad that it should apply to none. It is time for the sweetheart deals and backroom exemptions to end.

"The devastating effects of the President's health care law are not a partisan issue. Businesses see it. American families see it. Even union leaders like James Hoffa see this train wreck coming. It is time for Senate Democrats and the President to get off the sidelines and work in a bipartisan way to fund the government while eliminating special political exemptions."

With 175 members, the Republican Study Committee is the largest multi-issue caucus in Congress.

Keep in mind 175 conservative Republicans don't represent a majority so that if Speaker Boehner were to bring a clean CR to the floor for vote it would in all likelihood pass by a vote of roughly 257 to 175 assuming moderate Republicans and all Democrats would vote in favor of passing the CR.

The Tea Party Republicans role

Many, myself included (at least at the outset of this investigation) are perplexed as to how the Tea Party Republicans seem to be the "tail that is wagging the dog" in this situation. After all there are only 49 Tea Party Republicans.

This group seems bent on using all tactics available to effect change and stop the "kick the can" approach to governance. They have had enough of the "business as usual" approach and seem more than willing to take us to the brink of economic disaster if need be to effect these changes. Equally important is the fact that they seem quite secure in their position as they were sent to Washington by the voters with a mandate to effect these changes. Politically speaking they can take us to the brink and they run a greater risk of being voted out of office if they don't follow this course than they do if they cave to the pressure.

Still, they are only 49 in number so how do they hold such incredible sway over the House of Representatives. Well one way they can do this is by simply refusing to vote along party lines. For instance a compromise bill proposed by Republicans that doesn't seem to go far enough for the Tea Party contingent may be voted down if the Tea Party Republicans vote with the Democrats. That in itself is a lot of power in the give and take world of politics and partially explains why the Tea Party cannot be ignored. In other words the Tea Party can effectively block all legislation proposed by Republicans if the vote falls along party lines.

Additionally, there is a growing ground swell of support for the Tea Party candidates and they have successfully unseated incumbents in several cases. The truth is many voters are sick and tired of the status quo in Washington and see the Tea Party candidates as the best route to real reform and a stop to "kick the can" politics.

Another reason the Tea Party holds such sway is the Hastert Rule that - if followed - means no bill is brought to the floor for vote if it doesn't have the support of the majority of the Republicans. Here is an excerpt from Wikipedia that explains the Hastert Rule:

The Hastert Rule, also known as the "majority of the majority" rule, is an informal governing principle used by Republican Speakers of the House of Representatives since the mid-1990s to maintain their speakerships[1] and limit the power of the minority party to bring bills up for a vote on the floor of the House.[2] Under the doctrine, the Speaker of the United States House of Representatives will not allow a vote on a bill unless a majority of the majority party supports the bill.

The Hastert Rule is really just an informal statement on protocol and not a hard and fast rule. Speaker Boehner has ignored the rule on 4 occasions this year as reflected in the following excerpt - again from the article referenced above:

John Boehner (2011-current): As of May 14, 2013, of the nine bills and joint resolutions passed by the 113th Congress, four of them were passed without a majority of the Republican caucus in support.[14]

In December 2012 Boehner told his caucus in a conference call "I'm not interested in passing something with mostly Democrat votes" and that did not have the support of the majority of the Republican caucus.[15][16] Nonetheless, Boehner allowed a vote on January 1, 2013 on the American Taxpayer Relief Act of 2012 (also known as the "fiscal cliff bill") with only 85 out of 241 Republicans in favor (a support level of only 35%) and the bill passed with the support of 90% of Democrats (172 out of 191).[17][18] The bill's passage marked the first time in more than ten years that a measure passed a Republican-controlled House when opposed by a majority of House Republicans.[19] In response, former House Speaker Hastert criticized Boehner for not adhering to the "majority of the majority" governing principle by saying, "Maybe you can do it once, maybe you can do it twice, but when you start making deals when you have to get Democrats to pass the legislation, you are not in power anymore."[20][21]

Two weeks later, on January 15, 2013, Boehner allowed a vote on aid to victims of Hurricane Sandy to take place without the support of a majority of the Republican caucus. [22] The vote passed with 241 votes, but only 49 of the votes were from Republicans or a mere 21% of the majority.[23] Since then some notable Republicans have publicly questioned whether the "majority of the majority" rule is still viable or have proposed jettisoning it altogether.[23][24][25]

In spite of all the criticism, on February 28, 2013 Boehner brought a third bill for a vote on the floor of the house which did not have support of majority of Republicans. The bill, an extension of the Violence Against Women Act, received the vote of only 38% of the Republicans in the House of Representatives.[26]

On April 9, 2013, the "rule" was ignored a fourth time, on a bill about federal acquisition of historic sites. The bill was passed with more than two thirds of the House vote but without a majority of the GOP caucus.[27] Shortly thereafter, Boehner said, "Listen: It was never a rule to begin with. And certainly my prerogative - my intention is to always pass bills with strong Republican support."[28]

There are two ways to pass a clean CR and resume "business as usual"

If John Boehner allows a vote on a clean CR it will - in all likelihood - pass as it will get the support of the House Democrats and at least some of the more moderate Republicans. Of the roughly 57 moderate Republicans only 18 would need to break rank to pass the clean CR and that is highly likely.

For that to happen Boehner will have to violate the Hastert protocol for a 5th time this year and submit a matter for vote that clearly won't have a "majority of the majority" support. Since it is the "majority of the majority" that dictates who will be Speaker the current Speaker - John Boehner - finds himself in the uncomfortable position of being labeled a Democrat in Republican clothes if he takes this route and that would be justified.

Political futures are at stake here and it seems certain that if Boehner relents on this matter his political future is bleak if he has one at all going forward. One has to ask - will Boehner fall on his own sword on this matter as that is what is required in order to pass the clean CR that Obama and the Democratic Senate are demanding. This is how Dennis Hastert characterized the situation as it relates to his namesake rule:

"Maybe you can do it once, maybe you can do it twice, but when you start making deals when you have to get Democrats to pass the legislation, you are not in power anymore."

There may be a second way to bring a clean CR to the floor though. It is called a "discharge petition" and defined here:

A discharge petition is a means of bringing a bill out of committee and to the floor for consideration without a report from the committee and usually without cooperation of the leadership. Discharge petitions are most often associated with the U.S. House of Representatives, though many state legislatures have similar procedures. They are used when the chair of a committee refuses to place a bill or resolution on the Committee's agenda; by never reporting a bill, the matter will never leave the committee and the full House will not be able to consider it. A successful petition "discharges" the committee from further consideration of a bill or resolution and brings it directly to the floor. The discharge petition, and the threat of one, gives more power to individual members of the House and usurps a small amount of power from the leadership and committee chairs. The modern discharge petition requires the signature of an absolute majority of House members (218 members). Only twice has it been used successfully on major legislation in recent history.

For this to work at least 18 Republicans would have to break rank. There are clearly more than 18 Republicans that favor a clean CR but the political risks in following this course is again a "fall on your own sword" situation. Here is how a Huffington Post article explains the prospects of this actually working:

If all 200 Democrats sign the petition, 18 Republicans would have to join them in order to hit 218 signatures, the magic number needed to move forward with the petition. Democrats already know there are at least 21 Republicans who would support a "clean" government funding bill, with no strings attached. But declaring support for such a bill and signing a petition to force it to the House floor, against the will of House GOP leaders, are two entirely different things.

In the same article House Minority Whip Steny Hoyer is quoted here:

But House Minority Whip Steny Hoyer (D-Md.), also at the event, acknowledged what may keep Republicans from signing on: fear of retribution from the tea party, namely in the form of a primary challenger in the 2014 elections.

"I think the fear factor on the Republican side is very high," Hoyer said. "I have very good relationships with most of the Republican side of the aisle ... They tell me that their guys are being threatened if they do anything like [supporting a clean funding bill]."

Perhaps more important is the very temporary nature of a clean CR. After all, it is only a stop gap measure that will allow "business as usual" for another 60 days or so as the parties take up the real matter - the budget and the debt ceiling.

Does it really matter - what is at stake here?

If I were a member of the RSC or the Tea Party I would argue that we have simply got to stop the insanity. As uncomfortable as the truth is we must at some point face the truth and the truth is we have borrowed and spent our way into a really serious situation where a continuation of "business as usual" is no longer sustainable. These aren't my words though - the CBO told us that back in 2012 when we were dealing with the "fiscal cliff". Here is an excerpt from a recent article from the CBO on the matter of continuing with the current borrow and spend policy:

How long the nation could sustain such growth in federal debt is impossible to predict with any confidence. At some point, investors would begin to doubt the government's willingness or ability to pay U.S. debt obligations, making it more difficult or more expensive for the government to borrow money. Moreover, even before that point was reached, the high and rising amount of debt that CBO projects under the extended baseline would have significant negative consequences for both the economy and the federal budget:

Increased borrowing by the federal government would eventually reduce private investment in productive capital, because the portion of total savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income in the long run than would otherwise be the case. Despite those reductions, however, the continued growth of productivity would make real (inflation-adjusted) output and income per person higher in the future than they are now.

Federal spending on interest payments would rise, thus requiring larger changes in tax and spending policies to achieve any chosen targets for budget deficits and debt.

The government would have less flexibility to use tax and spending policies to respond to unexpected challenges, such as economic downturns or wars. The risk of a fiscal crisis-in which investors demanded very high interest rates to finance the government's borrowing needs-would increase.

The comments above fail to address the matter of unfunded liabilities and the veritable Ponzi scheme that is in place at the present as it relates to entitlements. Here is an excerpt from a Wall Street Journal article that attempts to quantify these liabilities:

As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.

Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities imply. Borrowing on this scale could eclipse the capacity of global capital markets-and bankrupt not only the programs themselves but the entire federal government.

These real-world impacts will be felt when currently unfunded liabilities need to be paid. In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected.

In exchange for the payroll taxes that aren't paid out in benefits to current retirees in any given year, the trust funds got nonmarketable Treasury debt. Now, as the baby boomers' promised benefits swamp the payroll-tax collections from today's workers, the government has to swap the trust funds' nonmarketable securities for marketable Treasury debt. The Treasury will then have to sell not only this debt, but far more, in order to pay the benefits as they come due.

You get the point - we can't just keep "kicking the can" and must at some point swallow the bitter pill of implementing fiscal reform and that is the mantra of the Tea Party. Are they wrong on this point - certainly not. But do we have to do it now?

That is the view the political class in Washington seems to have and I certainly understand that view. The consequence is painful. If I were a member of the Democratic contingent in Washington I would explain with abject clarity the consequence of taking corrective action now and why it will do severe damage to the fragile economic recovery.

Consider this excerpt from the Wall Street Journal article referenced above:

As a result, fiscal policy discussions generally focus on current-year budget deficits, the accumulated national debt, and the relationships between these two items and gross domestic product. We most often hear about the alarming $15.96 trillion national debt (more than 100% of GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As dangerous as those numbers are, they do not begin to tell the story of the federal government's true liabilities.

Here is the point I would make - if the 2012 deficit was 6.97% of GDP and GDP was roughly 2.5% then if we move to a balanced budget (which does nothing to reduce the unfunded liabilities) we would have seen a negative GDP growth in 2012 of 4.47%. I would assert that we simply can't move to fiscal austerity at this point as it will result in recession and make the problem worse than it already is.

I would be right if I argued the Democrats' perspective on this matter but I would also be right if I argued the Tea Party perspective. The idea that a black and white answer exists is nonsense as it does not. Neither of the views is wrong and that creates a really difficult conundrum. No one wants to submarine the economic recovery but it is really kind of hard to call it a recovery at all if it is being supported only by deficit spending and deficit spending is unsustainable.

I'll be honest - I am not sure what I would do if I were John Boehner. The truth is if he chooses to put the clean CR to a vote he won't have to worry anymore about his political future as he probably won't have one. If he doesn't take that course the outcome may end up being the same as a default on our government debt obligations could have catastrophic consequences of a magnitude few can appreciate.

What are the chances of a default?

At this juncture the chance of a default is real in spite of what many see as just another alarmist warning used for the purpose of gaining political advantage. Is that what President Obama and Treasury Secretary Jack Lew are doing - just "crying wolf" to pressure the GOP in the House to cave in?

Well there are two ways we avoid default. The first is for Boehner to relent and put the clean CR to a vote. The second is for Obama to allocate sufficient funds to pay our debt obligations from monthly revenues.

Understand this - the ultimate decision to default must fall squarely on Obama as they don't have to default on our debt obligations. Here is why - gross revenue for the US is estimated at approximately $2.7 trillion in 2013. In other words even if the government can't pay all its obligations it can pick and choose and in so doing avoid default on interest payment obligations.

Here is how the Bipartisan Policy Center explains the matter in a recent WSJ article:

BPC said, for example, the government must pay roughly $12 billion in Social Security benefits on Oct. 23, $6 billion in interest payments on Oct. 31, and $55 billion in Medicare, Social Security, military and veterans benefits on Nov. 1.

The group also said that spending cuts that would be required if the debt ceiling isn't raised could be quite steep. For example, BPC said if the "X-date" arrives Oct. 18, the government would be $106 billion short on its bills between Oct. 18 and Nov. 15, leaving the government unable to pay 32% of the required funds during that time.

If we can't pay 32% of our obligations in the current shut down situation that means we can pay 68% and per the BPC a $6 billion interest payment can be made if the President is willing to do so. Will Obama do it? That may seem obvious and I would guess he would in fact avoid default on our debt obligations but one can't be certain. It is hard to say the President isn't doing all he can to force the hands of the Republicans to surrender. If they refuse will he attempt to use this situation as a way of gaining political advantage? For that matter will it work or will it backfire?

Just so you know - preparations are being made for a worst case scenario

President Obama, Harry Reid and Treasury Secretary Lew have all stated that the risks are real and all are surprised that the markets don't think so - at least for now. Here is what Obama said recently on the markets' complacency:

"I think this time's different. I think they should be concerned. And - I had a chance to speak to - some of the financial industry who came down for their typical trip. And I told them that - it is - not unusual for Democrats and Republicans to disagree. That's the way the founders designed our government. Democracy's messy. But when you have a situation in which - a faction is willing potentially to default on - U.S. government obligations - then we are in trouble."

And on Friday this is what John Boehner had to say. Boehner was referring to a quote from an anonymous senior Obama administration official in the Wall Street Journal Friday:

"We are winning," the official said, adding that "it doesn't really matter to us" how long the shutdown lasts "because what matters is the end result."

"And then this morning, I get the Wall Street Journal out, and it says, 'Well, we don't care how long this lasts because we're winning.' This isn't some damn game!" Boehner said.

My take on the matter is that Obama is all in on this one and anything short of a clean CR may result in a US default even if it doesn't have to happen. Boehner - perhaps in response to Obama's "no compromise" stance - seemed very emotional and a little distraught on Friday. Quite honestly I have a lot of empathy for Boehner at this point and also agree that "this isn't some damn game."

Perhaps all this doesn't end in default but there are many who simply don't see it this way. As Obama notes "this time's different". Consider the following comments in this article dealing with the preparations being made to handle trading in defaulted US Treasuries:

WASHINGTON (Reuters) - While most on Wall Street continue to believe it very unlikely the United States will default on its debt later this month, banks and securities firms are already gearing up for how to handle any U.S. Treasuries tainted by missed payments.

The Securities Industry and Financial Markets Association, a trade group that represents hundreds of securities firms, banks and asset managers, has drawn up plans so that trading platforms can still process deals involving defaulted U.S. Treasuries, SIFMA Managing Director Rob Toomey said on Friday.

And the time is almost upon us - again from the Reuters article referenced above:

Borrowing costs could surge for businesses and consumers and the stock market could plunge. The Treasury warned on Thursday that a default could trigger a financial crisis and the worst recession since the Great Depression. SIFMA will be on high alert for a default beginning on October 16, the day before the Treasury says it might be forced to stop adding to the national debt.

The next day, the Treasury must make principal and interest payments. Debt payments are also due on October 24 and October 31. The Congressional Budget Office has forecast that the nation would not start defaulting on its obligations, which include everything from debts to Social Security checks, until October 22.

What happens to the bond market in a default scenario? The rational response would be to assume it is only temporary and that sooner or later we will resolve the matter and set all things right. The problem is that investors aren't really likely to take that course and why would you?

At the onset of a potential panic - and no one can know for sure if the markets will experience panic - the adage that "he who panics first panics best" seems to be the most logical and prudent approach. In other words it is best to get out now and see how all this unfolds and the first in line will get hurt the least, relatively speaking.

That seems the logical response to me as the time for a potential default gets closer and closer. If a sudden panic does occur, bonds could literally crash, sending borrowing costs sharply higher and choking off economic growth globally.

Discerning the resolve of the key players

Doomsday scenarios hardly ever materialize and that is a fact. One can certainly understand the logic employed by investors that assume the worst case scenario will be avoided and the key players will - in the end - do the right thing.

I understand that logic but I also agree with all those who are weighing in on the matter. For instance Obama's "I think this time's different" or Boehner's "This isn't some damn game" comments. The big question though is how far are these two likely to take this situation and do they really understand the unintended consequence of such an action.

Make no mistake - unintended consequences do occur and much more frequently than most are willing to admit. Consider this excerpt from an article entitled the Paul Volcker Myth:

Contrary to modern accounts of that period suggesting Volcker's policies whipped inflation, the markets had as mentioned already "voted" on them with gold having reached an all-time high in his early years at the Fed. The weak dollar that gold signaled was itself inflation, not a cause of the latter, and with Reagan's election and its policy aftermath having boosted the dollar, inflation was effectively contained.

Sadly, Volcker did not agree. Seeking to tighten further through futile attempts at managing the various monetary aggregates, his actions sent the economy into a major recession which led to the '82 electoral rout, and which made Reagan's 1984 re-election prospects increasingly dicey. Worse for the Reagan program, Alan Greenspan and Herbert Stein gave Volcker enhanced political cover given their view that the tax cuts themselves would be inflationary.

So rather than accommodating the Reagan tax cuts with increased liquidity, Volcker went in the opposite direction until a looming Mexican loan default threatened the worldwide banking system. The time was October of 1982, and on October 9th of that year Volcker finally abandoned the monetarist approach to Fed policy that had proven so disastrous.

The resulting expansion of dollar liquidity did not prove inflationary as so many (including Milton Friedman) assumed it would, because by 1983 the marginal tax cuts Reagan had championed fully kicked in. Contrary to suggestions today that say tax cuts are slow to impact the economy, a combination of lower rates and increased dollar liquidity Fed an economic boom that led to Ronald Reagan's landslide re-election in 1984.

Know this - recessions are almost always caused by miscalculations on the consequence of a particular policy and/or regulatory action/blunder. More importantly they occur with relative frequency. If we do allow a US debt default the consequence - unintended or not - could indeed be catastrophic but it can be argued that if we do default it will only be because President Obama chose to do so.

I'm not letting Boehner off the hook in this situation nor do I necessarily support the Tea Party contingent. In fact if I were in the House I would very begrudgingly vote as Obama has dictated I should and pass a clean CR. What would make me angry in this situation is that I would resent the hard stand position taken by Obama that suggests he isn't bluffing and is willing to collapse economies globally if need be to have his way.

Here is what is most disconcerting though - perhaps Obama will do so anyway and perhaps that is all a part of his agenda in the first place. That is almost incomprehensible for most but there are reasons to believe that Obama may see it as a long term benefit for all.

Why Obama may actually choose to default

Consider Obama's stance on the New World Order currency regime. Obama is not on record as being in favor of a new currency regime that abandons the dollar for a non-sovereign reserve currency but his Vice-president is, as is his former Treasury Secretary Tim Geithener and the only candidate Obama has offered up as a replacement for Ben Bernanke - Donald Kohn.

Here's a comment from Biden that he made in his New World Order speech back in April:

The task we have now is to actually create a new world order. Because the global order is changing again, and the institutions that have worked so well in the post-World War II era for decades, they need to be strengthened, and some have to be changed. So we have to do what we do best, we have to lead. We have to lead. We have to update the global rules of the road. We have to do it in a way that maximize benefits for everyone, because obviously, it's overwhelmingly in our interest, this is not a zero sum game, it's overwhelmingly in our interest that China prosper, that Mongolia prosper, that nations big and large, east and west, in Latin America and in Africa, prosper, because you know that old expression, they asked Willie Sutton why he robbed banks, he said 'that's where the money is.' We want everybody to have a little money to make sure they can buy American products. So the paradox - so we don't view, the President and I and Fred [Hochberg, President of the Export-Import Bank], we don't view economic growth as a zero sum game here, that somehow we grow and it's not in our interests if other powers grow as well. That's the paradox of this new global order. So much of our success depends on the success of those with whom we compete.

And this from a Tim Geithner/Michelle Bachmann exchange:

Rep. Michele Bachmann (R-Minn.): We've seen both China, Russia, and Kazakhstan, make calls for an international monetary conversion to an international monetary standard as soon as the G20, and I'm wondering would you categorically renounce the United States moving away from the dollar and going to a global currency as suggested this morning by China and also by Russia, Mr. Secretary?

Treasury Secretary Timothy Geithner: I would, yes.

And consider this Geithner comment from the same article referenced above:

However, on March 25, at an appearance in New York at the Council on Foreign Relations, Geithner was asked if he was considering the proposal that People's Bank of China Governor Zhou Xiaochuan made in advance of an upcoming G20 summit to use a mix of currencies as the global standard.

Geithner said in response: "As I understand his proposal, it's a proposal designed to increase the use of the IMF's (International Monetary Fund's) special drawing rights. And we're actually quite open to that suggestion."

And from Donald Kohn this statement:

The crash of five years ago warrants a lot of work looking at new approaches to regulation, of the sort that the International Monetary Fund, international regulatory groups and others are advocating.

Consider that Donald Kohn is the only name actually offered up directly by President Obama as a possible candidate for the Fed Chairmanship. Kohn's background is impeccable and he has a long history with the Fed as noted in a Businessweek article:

Kohn, 70, now a senior fellow at the Brookings Institution in Washington, spent 40 years at the Fed. He was Bernanke's most important supporter and adviser during the financial crisis. He became a Fed governor in August 2002 and served as vice chairman from June 2006 until June 2010.

Earlier, Kohn was one of former Chairman Alan Greenspan's closest advisers as director of the Division of Monetary Affairs from 1987 to 2001. He helped Greenspan manage the 1987 stock market crash and adopt the federal funds rate, the rate for overnight lending among banks, as the Fed's main signal for monetary policy.

And on the matter of crisis management:

Kohn has more experience dealing with Fed policy in the crucible of a crisis, including as part of Bernanke's inner circle in 2007-2008 and as a close adviser of Greenspan during the emerging markets crises of the 1990s and in the aftermath of the Sept. 11, 2001, terrorist attacks.

Did Obama throw Kohn's name in the hat for a reason that may not be so obvious to most. If Obama's unannounced agenda is to usher in the New World Order and the SDR as the new reserve currency asset then Donald Kohn makes a lot of sense. In particular if the stand off on the CR, debt and deficit precipitates a default and results in a stock and bond crash/crisis. After all it would appear Kohn is just fine with the IMF's agenda and he is certainly credentialed as a crisis manager.

Concluding thoughts

The perspective that most take on the matter of the stand off on the issue of a clean CR and more importantly - on the matter of the debt and deficit - is a kind of self righteous indignation at the dysfunctional nature of Congress. I feel no such indignation toward any of the parties. My own view is usually arrived at by asking myself what I would do were I in charge. Quite honestly the answer is not at all clear to me.

I see both sides having very valid positions. In fact I see 3 different views here and I see all 3 as being valid perspectives. I see the Tea Party/conservative Republicans as recognizing the need for dramatic fiscal reform and they are right. I see the Democrats recognizing the negative consequence - especially in the short run - to the economy if austerity is imposed.

And finally I see the President's agenda as particularly ambitious in that I believe he really does want to usher in a New Bretton Woods System. Understand that it is not easy for me to go there as I am not a big supporter of Obama but I do think the only real solution that puts us back on a path to economic stability and economic growth requires change of the kind I think Obama and Kohn support.

So if the whole matter does unfold in the way I think it will, what happens to the markets? If Boehner holds firm there will be no clean CR and that will mean Obama has to make a choice on whether or not to default on interest payments. My guess is Obama also holds firm and allows a default. That of course means bonds (NYSEARCA:TLT) and stocks (NYSEARCA:SPY) fall. Additionally, the US Dollar (NYSEARCA:UUP) will suffer and that should produce a strong bid for gold (NYSEARCA:GLD).

I could of course be wrong as it is difficult to know how all this ends up being resolved but caution seems the preferred course at this point. The risks are simply too high in stocks and bonds and the rewards not readily apparent at this point. For long term buy and hold investors, puts on SPY or calls on any of the VIX ETFs seem well advised. For short term traders any of the inverse ETFs in stocks and bonds makes sense. I also think long positions in the precious metals will be amply rewarded if the matter evolves as I think it will.

Disclosure: I am long FAZ, UVXY, VXX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long SPY puts and PCLN puts