I’m going to explain the situation and give you three ways to protect yourself from this impending crisis before it’s too late…

A Debt Crisis is Coming to America as Early as May 2011

America’s debt ceiling currently stands at $14.3 trillion – the level that, by law, the government’s debt is not allowed to exceed – but the trouble is, the government’s present debt has swelled to $13.7 trillion [already] and this means that at the current rate, we’re on course to smash through that $14.3 trillion ceiling around May 2011 (although it might happen a month or two later, depending on what budget cuts are enacted in the next few months and how quickly they’re implemented) unless something is done quickly to avert what would develop into a major crisis of confidence in the U.S..

The Domino Effect of the Crisis Would Be Brutal

What will the government do about this impending crisis? Same thing it’s done almost every year since 1962 – raise the debt ceiling so America can pay its bills. Congress really has no choice in the matter either. If the ceiling isn’t raised, we’ve got a problem – a crisis – and a very big one. Without Congressional approval for additional debt, the U.S government cannot pay its bills – most notably, interest payments on treasury bonds, bills and notes.

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If America defaults on those payments, or even misses them by just one day, the domino effect of such a crisis would be brutal…

• Domino #1: The country would lose its AAA credit rating and those bonds, bills and notes would no longer enjoy their status as the safest investments on the planet.
• Domino #2: In turn, a lower credit rating would mean that the United States would pay higher interest on its bonds in order to attract investors. Result?
• Domino #3: A tidal wave of selling through fixed income markets, driving interest rates higher still.
• Domino #4: Social Security would be hit hard, as its funds are invested in Treasuries. Suddenly, Social Security would have far less resources than just a day or two earlier.
• Domino #5: If money is pouring out of so-called “safe” investments, you can bet that in that kind of environment, the demand for riskier investments would be next to nil. Stocks and financial markets around the globe would plummet.

The Circumstances Surrounding Whether or Not to Raise the Debt Limit Are Very Different This Time Round – and the Consequences of Not Doing So Would be  a Crisis of Major Proportions!

This year’s Congressional raising of the debt limit is different than [any previously] … because, this year, some members of Congress have said they won’t vote to raise the debt ceiling – and they may be serious this time.

Earlier this year, 38 Republican Senators voted against raising the ceiling [doing] so, knowing full well that they would  be outvoted and that the limit would be raised despite their “objections.” That way, they could return to their Congressional districts, claiming some semblance of fiscal responsibility. Their vote didn’t matter so much back then… but with the Republicans having wrestled control of the House of Representatives last week, it sure does now. [It is a crisis in the making.] [This year’s vote] throws up an interesting dilemma. The Republicans – and particularly the Tea Party candidates who ran on a platform of cutting spending and the deficit – will have a very difficult choice to make. Either go back on their word and vote for an increase in the debt ceiling, or vote against it and run the risk of a financial crisis – a calamity.

It’s still early, but some Senators are already threatening to vote “no” – [to set the groundwork for the crisis in motion].

• Senator-elect Rand Paul of Kentucky has indicated that he won’t vote in favor of raising the debt ceiling.
• South Carolina Senator Jim DeMintsaid he won’t vote to raise the limit unless it’s combined with some plan to balance the budget, return to 2008 spending levels and repeal President Obama’s health care plan.
• Utah Senator-elect Mike Lee, when asked if he’d vote against a debt ceiling increase, even if it leads to a government shutdown answered, “It’s an inconvenience. It would be frustrating to many people and it’s not a great thing, yet at the same time, it’s not something we can rule out.”
• Republican National Committee Chairman Michael Steele told CNN, “We’re not going to compromise on raising more debt or the debt ceiling.”

[Such a political strategy may prove to be the makings of a major crisis because the lay of the land is different these days than in the past]… In 1995, the Republicans threatened President Clinton with shutting down the government if he didn’t agree to their budget but Clinton vowed that he’d never agree to it, even if his approval rating fell to 5%. [In the long run] he won. [While] the government did, in fact, shut down the Republicans became the focal point of America’s anger and President Clinton’s approval numbers actually went up. [That was then.]

Flash forward to today. President Obama is likely aware of this history and while he may be willing to negotiate on spending cuts he will not repeal health care reform which is the hallmark of his Presidency so, for Obama, the situation in 2011 will be much worse than it was for Clinton in 1995. I’m talking about a crisis of major proportions, namely, a meltdown in the stock and bond markets!

Washington Style Rhetoric Could have Devastating Consequences on the Markets

Bruce Bartlett, a former advisor to President Reagan and deputy assistant secretary for economic policy at the Treasury Department under President George H.W. Bush, recently stated, “You introduce even the tiniest little bit of doubt into the minds of ultra-conservative investors and that’s potentially disastrous. It hurts our ability to raise money without a risk premium.”

The Senate likely doesn’t have the votes to defeat a bill to raise the debt ceiling, while the House does [but] in the end, it doesn’t matter. The bill doesn’t have to be defeated. A filibuster accomplishes the same thing. In fact, a filibuster is even more powerful than a “no” vote and the mere threat of a filibuster could spook investors badly enough to sell first and ask questions later.

Protect Yourself From America’s Debt Showdown

You need to go about protecting yourself now from the distinct possibility of such a calamitous event. Here are a few investments that will likely do well in the chaotic environment I just described…

• Gold: The resilient yellow metal should soar as the U.S. dollar sinks and investors flee to safety. If you don’t want to own the metal itself, you can buy the SPDR Gold Shares Trust (NYSE: GLD) ETF, which serves as a close proxy to the price of gold bullion.
• Short Treasuries (Option 1): Consider the ProShares Short 20+ Year Treasury (NYSE: TBF), which aims for a 100% inverse correlation to the Barclays 20+ Year U.S. Treasury Bond Index.
• Short Treasuries (Option 2): If you’re a more aggressive investor, take a look at the ProShares UltraShort 20+ Year Treasury (NYSE: TBT). It seeks to obtain results that are double the inverse daily performance of the Barclays 20+ Year U.S. Treasury Bond Index. So if the index falls 10%, the ETF should gain about 20%.

Conclusion

Investors who are agile and aware of the potential debt ceiling landmine can grab profits by getting into the right investments at the right time. Additionally, the ensuing volatility may create buying opportunities for some of your favorite stocks, so be sure to put together a watchlist of stocks you’re interested in owning at lower prices.

From most crises comes opportunity – and this impending debt crisis is another such opportunity