The Debt Ceiling And Implications For Gold Investors

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The flood of news about the recent US government shutdown and the debt ceiling triggered a discussion between Claudio Grass from Global Gold and Pater Tenebrarum from Acting-Man. The consensus between both was that most news items and analysis miss some key points. In some cases, the consequences of the worst case scenario are overestimated (resulting in doomsday expectations), while in others the seriousness of the debt “ceiling” has been overestimated. Besides, the potential outcomes in different scenarios after the events remain rather underexposed. These observations led to a thorough analysis, but one from an Austrian perspective, written by Pater Tenebrarum. This is a must read for physical gold investors.

Anyway, the president and his party (who naturally wish to see the debt ceiling increased sans conditions, i.e., they want to be free to continue to spend with both hands) have decided it is time to play the ‘default scare card’. We should perhaps point out here that a ‘ceiling’ that keeps getting raised is not a ‘ceiling’ at all, so one wonders why it was created in the first place.

On the other hand, because the debt ceiling occasionally provides us with wholesome diversions such as government shutdowns, we must admit it is not an entirely useless piece of legislation. In fact, what we have here is a rara avis that successfully combines entertainment with education. One might call it an infotainment bill.

Pater Tenbrarum continues …

While it is true that a default by the US government would have grave repercussions – for instance, it may well end the dollar’s dominance as the world’s reserve currency, which is an extraordinary privilege enjoyed by the US – a failure to raise the debt ceiling won’t lead to a default unless the treasury decides to default voluntarily.

The only thing that needs to be done to avoid a default is to merely stop deficit spending. The US treasury takes in some $2.4 trillion in tax revenue every year. That should give it plenty of scope to both continue pay interest on its existing debt as well as paying the principal on maturing debt (note that it can also issue new debt as long as it repays old debt and thereby remains within the limit imposed by the ‘ceiling’).

In fact, the only thing that would happen if the ceiling were not raised is that it would finally morph from the joke it currently is into an actual ceiling. Of course this would also imply that there could be no more spending growth and that nearly all discretionary spending would have to be stopped. The government’s size would shrink by about a third, to where it was – 10 years or so ago perhaps?


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