For the first time in 100 years, it took more than one round of voting in early January to select the Speaker of the House of Representatives. In fact, it took a historic 5-day, 15 rounds of voting for the members of the U.S. House to choose Representative Kevin McCarthy as their leader.
What does this have to do with gold?
Well, the early signs from the contentious inner workings of the U.S. House of Representatives early this month bode poorly for a seamless approval to raise our nation’s debt ceiling limit.
The last time Congress held the debt ceiling hostage and took the U.S. to the brink of default was in August 2011 – gold soared to its then all-time high above $1,900 – as global investors turned to gold as a safe haven. Standard & Poor’s downgraded the U.S. credit rating and the stock market tanked.
Could it happen again? The early political in-fighting in the House of Representatives has plenty of folks wringing their hands in worry.
Failing to raise the debt ceiling could lead to an “unmitigated disaster,” said David Kelly, chief global strategist at JPMorgan Funds, told investors in a client note.
The U.S. is slated to reach its $31.4 trillion debt ceiling limit this month – and the U.S. Treasury will resort to extraordinary measures to keep paying the nation’s bills – until they run out of cash.
What are extraordinary measures? Think about someone rummaging through couch cushions or jacket pockets looking for extra cash to pay for the pizza delivery.
Yes, it’s true – without an increase to the debt limit, the U.S. Treasury will run out of cash to pay everything from interest payments on our nation’s Treasury debt to Social Security payments to America’s elderly.
What isn’t always clear in the media articles about raising the debt limit is this: The U.S. has already borrowed and spent the money. In fact, the spending was already approved by Congress.
Failure to increase the debt ceiling is like someone who refuses to pay their credit card bill – after they have already bought the stuff.
It’s only in recent years that the debt ceiling has become a political tool.
In fact, since 1960, Congress has acted 78 times to raise, temporarily extend or revise the definition of the debt limit, according to Treasury. The debt limit was changed 49 times under Republican presidents and 29 times under Democratic administrations, CBS News reported.
What would happen if Congress doesn’t raise the debt ceiling and the U.S. defaults on its debt payments?
It would destroy the global market’s confidence in American Treasuries and the U.S. Dollar as the reserve currency. It would trigger a recession in the U.S., cause millions of Americans to lose their jobs and the stock and bond markets would crash. Social Security checks would stop coming. Interest rates would soar because in order to continue funding the massive U.S. debt – America would be forced to pay extremely high rates of interest on new bonds – because no one would trust Treasuries anymore.
Gold could easily climb to new all-time highs – as it did in 2011.
The House speaker fight was merely a preview of how Congress is hamstrung by political in-fighting. The future of the global economy’s faith in the full credit of the U.S. government – is at risk. The stakes couldn’t be higher.
Gold is already gaining ground every day as investors are seeking the safety of gold. Do you own enough?
The post What the Debt Standoff Ceiling Means for Gold appeared first on Blanchard and Company.
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