• be catastrophic,
• will last for decades,
• and will likely plunge the nation into a recession as bad as the Great Depression.

Despite the gravity of a potential debt default many find it impossible to believe that the members of Congress and the White House cannot come to some agreement that will avert such a disaster. For example, Warren Buffet is quoted as saying that the government will proceed to the point of extreme idiocy but not any farther. Since our job on this site is to look for profitable investing tips let us consider how an investor might approach this situation considering the terrible economic impact of debt default should that occur.

The Details

Economists are in agreement that the economic impact of debt default would include the following:

• Higher interest rates
• Hording of money and a lower rate of investment
• Higher payment on US debt as investors demand more for their risk
• Unemployment due to a contracting economy
• Widespread layoffs immediately
• Slower economic growth very likely another recession
• All of which would likely last for a lifetime

Why Is This Happening?

A set of fundamental problems for the USA revolves around the cost of governing, the size of the national debt, the cost of servicing the national debt, the degree of intrusion of the US government into everyday life and decision making, and the increasing difficulty that the two political parties have dealing with each other in solving the issue of governance. A small group of Republican congressmen opposed the new health care bill, Obama Care. They appear to be willing to not only shut down the Federal Government which they have done but to throw the nation into default on its debts. Many believe that only such an extreme measure will result in a draw back on federal spending and the steadily accumulating federal debt. Thus there are otherwise rational politicians willing to endure the economic impact of debt default in order to remedy a long term issue of excessive government spending. Others would prefer a middle course in which default is averted and subsequent governance follows a more frugal path. Fundamental analysis for profitable investing on this issue is not difficult in that default will or will not happen and attention to the debt burden will or will not happen. Cautious investors may wish to purchase put options on certain stocks in order to protect against catastrophic loss in case of default and call options in anticipation a market surge when the issue is resolved.

Blood in the Streets Investing

The time honored quote from Baron Rothschild would seem to apply here, the best time to invest is when there is blood in the streets, especially your own. As the US Treasury has said, the economic impact of debt default would be catastrophic. Investing foreign stocks is probably not an answer as the US dollar is too central to global markets. Rather one needs to look at what stocks will weather the storm, wait until they are beaten down by the economic impact of debt default, and buy. Think of intrinsic stock value and a margin of safety when buying in a down market.

More Resources

There seems to be an unspoken aspect to the big move of money into smaller brokerage firms in the last months. Investors put their money with large Wall Street firms, closed their eyes, and expected unending investment success. That is not an adequate investment plan. An investment plan needs to be more than allocating your money to someone else’s so called conservative stocks, growth stocks, or small cap basket of funds.

If your investment plan is to let someone else manage your money in its entirety then don’t complain when your initial investment success turns to investment failure on Wall Street.

This is not to say that you cannot have investment success with a hard working, smart person managing your money. However, you need to stay connected to the investment plan and you need have a clear idea of what the investment advisor is putting your money into.

The very wealthy can afford to pay someone to develop an investment plan and, with attention to detail, expect investment success. The problem is that when you put your money with a large outfit you tend to get ignored by the money managers. For many investors last year, no one executed an investment plan to get them off Wall Street before the market collapse.

Investment success comes from knowing what you are doing, not just from picking the right investment advisor. Investment success comes from periodic review of your holdings and a well thought out investment plan that takes into consideration the perils of the markets when every investment advisor on Wall Street is in love with derivatives.

The question for all those folks moving their money to smaller firms is how do you predict success? If the folks you just moved your money to were contrarians last year does that mean that their investment plan for the future will lead to your investment success?

Investment success doesn’t come easy and it always involves some thought on your part. This will be especially true if you just moved your money to a small firm and the money manager is getting progressively busier. When will the next large investor’s business push your investments to the back burner?

When you start getting ignored and your investment plan turns stagnant maybe it’s time to pay attention to whether or not the people who are managing your money are heading for investment success or their own personal success.

Many smaller investment advisors may be doing very well right now and will attract more business becoming larger investment advisors. If you are one of the folks who moved your money away from the big firms, keep your own investment plan in mind and make sure that your new advisor doesn’t get too busy for you and your investment plan or you will see less and less investment success.

Keep in touch with your investments whether they are on Wall Street or Main Street. Don’t blame the advisor when it’s your money and you have ultimate control over your own investment plan. The best predictor of investment success is the time and effort you put into your own investment plan.