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Cramer: Why Fear Is Ruling the Market

This market is all about terror, Cramer said Friday.

“The shorts fear a good deal in Washington,” he said, “and everybody else is terrified of a bad deal that doesn’t stop our debt from being downgraded, or the horrifying, hideous prospect of no deal at all.”

The short-sellersrang the register Friday because they were afraid something good could happen over the weekend.

That’s because if a deal is reached that trims spending and raises taxes to the point where the US avoids a downgrade, then the market’s a “coiled spring,” Cramer said. And that’s the short-seller’s worst nightmare.

“The people betting against the stock market would have to come back in and buy those stocks that they sold at lower prices, perhaps as much as two or three percent higher or more,” he added.

Everyone else fears either a bad deal or no deal at all.

A bad deal would give the US short-term relief on the debt ceiling but would do nothing to fix the deficit long-term. That could result in a downgrade by Standard and Poor’s, and that would make it harder for the Treasury of the United States to sell AA rated debt than AAA rated debt. Since many institutions won’t even buy AA paper, the government will wind up paying higher interest rates to borrow money.

But it doesn’t end there. Since most other borrowings are priced off Treasuries, the consumers borrowing rates will go up right along with the government.

Then there’s what Cramer calls “the ugly.” That’s when there’s no deal and the government only has enough money to pay the military, Social Security, Homeland Security and interest and principal on bonds for a coupe of weeks.

“In the end, the jig will be up if there is no deal,” Cramer said. “Either the President invokes the clause in the 14th Amendment that obligates the government to pay its bills no matter what ... or the Treasury starts to sell some prized possessions, like gold in Fort Knox.”

If we do a hard default, he said, then there is no recovery from the ugly in 2011 and maybe not even in 2012.

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