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What the Debt Ceiling Hike Could Mean for the Near Future

It all seems like good news that congress apparently came to a type of agreement about the debt ceiling. The problem, though, is that it’s little more than kicking the can down the road, and it hasn’t been kicked very far at that. But then racking up more debt until the country’s borrowing ability has been maxed out seems to have become something of a lifestyle in Washington.

Wednesday’s passage of the debt ceiling hike is expected to be signed into law by Obama, and it will probably be pretty immediate. The amount that was approved for an increase was an unspecified amount because the language in the bill indicates that whatever the US debt happens to be on March 15 is the new limit. The present amount of debt that the US government has is about 17.2 trillion.

The bill also allows for a suspension on the debt ceiling issue until around next spring, which Washington says was intended to avoid any additional government shutdowns for this year so that the two parties can focus on other items.

What the bill doesn’t do is demand any government cuts to be made, which means that debt will be accruing that much faster.

The potential for a severe economic issue to occur that could bring on fresh damage to the economy and a new round of job instability is gaining momentum, and many investors are well aware of it.

Right now, they are more focused on the emerging markets that are at risk of hitting a boiling- over point because of the Fed tapering back the quantitative easing. Even though this presently involves markets such as China, the economy has become so global in nature that what happens even in the emerging markets is going to have an effect here. And that’s especially true with China since they are America’s biggest lender.

Another reason that investors are concerned about the emerging markets right now is that the interest rates are expected to increase as the tapering decreases. This makes investors rather uncomfortable to the point of pulling their money out of the emerging markets. At the same time, some in the financial industry believe that they have spotted a market bubble, and that there is going to be a correction in 2014, possibly as soon as the summer.

Josh Strauss of Appleseed Fund in Chicago doesn’t believe that such a correction would be limited to stocks: “The Fed has essentially pushed forward investment returns. And as a result, we think that both the stock and the bond markets are overvalued right now, overall.”

The major market indexes have been experiencing some pretty intense volatility on a global scale. That being said, it’s highly significant that the 2013 gains have been lost for each one, and a large portion of that is connected to the global emerging markets. Money from the quantitative easing efforts poured into these economies, and then 6.3 billion in stocks and bonds were rapidly removed by the investors in those markets when word got out about the tapering.

It’s a rather radical thought that the US Federal Reserve has basically been propping up the economy of the entire world. Former Federal Reserve bank examiner Mark Williams admits that, “It’s quite amazing as you really think about it. The Fed itself was not only propping up domestic markets, but also, we’re learning now with the rout in the emerging markets, that they were also helping and propping up these emerging markets.”

So if a major market correction really does happen sometime in 2014 as some in the financial industry are thinking, one has to question if even America would be able to comeback from something so severe. You can only continue to borrow and print money for so long before it all becomes valueless. 

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