The Debt Deadline Approaches

The countdown continues.

We are now only 75 days away from August 2, the day Treasury Secretary Tim Geithner says the U.S. will reach its borrowing cap. As the deadline approaches, pressure is being put both parties to come up with some sort of spending agreement. Money Map Press' Keith Fitz-Gerald joined Varney & Co. Thursday, to discuss what will happen if they do not reach one.

"What Treasury Secretary Geithner is warning about is the potential catastrophic failure of the United States dollar," said Fitz-Gerald.

If the federal government does default on its payments, it will become increasingly difficult to find nations willing to purchase U.S. debt. Those who do take the risk will undoubtedly hike interest rates, sending the value of the dollar on a downward spiral.

In the case of a default, Fitz-Gerald says "trillions of dollars become like toilet paper," a problem that will "cascade through the world's financial markets." U.S. Treasurys would be dumped at an alarming rate and dollar-denominated assets would loose their value.

"We will see the price of credit default swaps rise, we will see interest rates rise and we will begin see things like gold and silver and metals move quickly, because that is when the risk perception will change."

But so close to the cut-off date, why haven't the markets already had a more significant reaction?

According to Fitz-Gerald "traders right now believe that the government, rightly or wrongly, will come to an agreement and they will raise the budget ceiling."

"It is a psychological game right now that we really haven't seen begin," aid Fitz-Gerald.

If a deal is reached before August 2, Fitz-Gerald is confident the market will go up. While the rest of the U.S. waits for the debt verdict, Fitz-Gerald says the decision is clear:

"The market is addicted to cheap money. You don't want to take drugs away from the addict until they are ready to go to rehab. We are clearly not ready to go to rehab. Rightly or wrongly, I don't think they have a choice but to raise this."