From what I've been reading a debt default would cause interest rates to jump thus bond prices would fall. I've also read that the dollar would fall as well. Wouldn't this cause stocks to rise? Traditionally stocks rise when bonds fall. Lately the stock market has risen when the dollar falls. Would a default cause people to sell stocks, bonds, and the dollar? TT
I think it would also depend on who the lenders are? (foreign, fed, etc). Why you did not include Gold on your list? Where did you read about the fall of the dollar? Are you sure about that one? Isn't the problem of the dollar rather due to QE?
1) A failure to raise the debt ceiling will not cause a debt default. Gov revenues are 10x current interest expense. 2) The correlations you state only work under certain conditions. If there are serious fiscal concerns stocks, bonds, and usd could all fall as people move capital out of the U.S / USD-denominated assets.
Why would the above not lead to a rise in the dollar? (Sellers of USD-denominated assets are buyers of the dollar? A rise in interest rates would make cash dollars more "valuable"?).
Selling of USD-denominated assets doesn't increase the FOREX value of USD. If people sell those assets, they either increase their USD cash balances or convert those dollars into other currencies, so they can buy non-USD-denominated assets. You are not buying dollars when you sell those assets, only swapping them with someone who wants them more than the USD; assuming it's a domestic transaction, it has little to do with exchange rates, besides maybe the marginal effect on rate differentials. Rates can be a cause and/or an effect. During capital flight rates rise as the domestic currency falls.
In 2008, there was selling of assets, yet the dollar rose. Why do you think that a selling of assets necessarily mean that the proceeds would be leaving out? In addition an asset price retreat could be worldwide, and I do not see why the proceeds elsewhere could not be a source for a dollar demand.
In 2008 - when there was a crisis in the private sector - money flowed into the USD and then into treasuries. Fear of the U.S. fiscal/debt situation would reverse that flow. A selling off of assets doesn't necessarily mean proceeds will be leaving; it depends who is selling what, and why. But the more the market has concerns about the U.S. gov's ability to fund itself (rightly or wrongly) and pay its bills, the more foreign and domestic capital will look for safe yields outside the U.S. (It is conceivable the dollar and treasuries would rise if the market realizes that a) not raising the debt ceiling and/or b) a capitulation by the dems followed by severe austerity, would not cause a debt default (as revenues are 10x interest payments) and we get a repeat of 1937 where fiscal policy tightens drastically and a weak economy dips back into deflation/depression. Then you would have a situation where the global economy falls off a cliff, real rates, deflation expectations, treasuries, and the dollar rise while risk assets get sold.)
Equities would fall along with bonds. The inverse relationship decouples, as it does sometimes anyway.
Might also be a good idea to have some cash on hand and might be able to pick up some bargains if it goes on long enough and federal workers have to sell off property to survive.