How should I invest if I believe the US debt limit debate won't be settled on time?

June 15, 2011 3:17 PM

The debt limit will be reached August 2nd. Moody's said they may downgrade the US credit rating as soon as mid July if the debt limit isn't raised. What are the scenarios that might play out, and how can I invest for each scenario? Investing goals would be preserve value and seek growth.

Meanwhile Greece isn't making the Euro very strong. So betting against the dollar might not work?

Scenario - Moody's downgrades from AAA. Does the cost to borrow really go up? Are Treasury bonds special so the rating won't matter?

Scenario - Deadline reached and default.

Scenario - Deadline reached without compromise, but crisis held off by selling gold or who knows what.

Scenario - I am wrong, and compromise reached. How did my investments do?

Other Scenarios?

Investing funds can be inside a roth, a 401k, or taxable account.

posted by gearspring to work & money (6 answers total)

I don't think they're going to default, but I've been thinking about moving towards a larger cash position just in case they're crazier than I think they are.

Hopefully better financial minds than me will come along, but if they do default, you can expect that interest rates will go up (for Treasuries and other bonds), which means bond prices will fall. I would guess stock prices would also fall because oh my god, the economy is melting down, panic. You may see a rush to commodities since defaulting like that would almost have to be an inflationary event, but I don't understand the commodities markets well enough to be making any kind of recommendation for you.
posted by willnot at 4:31 PM on June 15, 2011

I think "deadline reached and default" will not happen. There was no government shutdown, and the stakes were a lot lower on that.

A more likely, and more interesting, scenario is one that you (and most people, for that matter) don't mention: the debt ceiling is increased, but just a few billion at a time--enough to keep the government going for a few days or a few weeks. I don't know if there is any precedent for that. However, I think that is unlikely to last long, as the resulting higher bond yields would scare the relevant actors into reaching a compromise.
posted by massysett at 5:43 PM on June 15, 2011

I realize the conventional wisdom is "deadline reached and default" won't happen. I just want to assume it will, and have some ideas on how to invest for that future.
posted by gearspring at 6:24 PM on June 15, 2011

I think this is an interesting question and I am looking forward to any answers if, in fact, it can be answered. I just do not know how one hedges against it--gold and metals are already up, commodities will fall substantially because there is a very real risk on an international slump/recession/depression, who knows about currencies, bonds will be at risk, need I go on. I would think long term profits are there for the taking if you buy commodities and stocks at the "bottom" of the slump. If it should happen I dearly want to think the Republican Party will disintegrate and take decades to reformulate themselves. It is very very interesting and unsettling time. I suppose the best case scenario is that there is a very severe crisis and we will need, and be able, to cut spending and increase revenue.
posted by rmhsinc at 6:27 PM on June 15, 2011

Perhaps buy options on the VIX? It is a measure of volatility and goes up (way up) when things go very bad. I have never bought them because I understand there are some oddities about them, but google can help.
posted by procrastination at 7:47 PM on June 15, 2011

Invest in bitcoins.
posted by markjamesmurphy at 9:13 PM on June 17, 2011 [1 favorite]