The national debt ceiling debate gave rise to this Washington Post headline last week: “World watches in disbelief and horror as U.S. nears possible default.”
The U.S. statutory debt ceiling is a useful device because the national debt is one of the few government numbers that people can easily focus on. It generates public attention. It stirs debate about deficit spending.
But we’re not sure that “horror” is quite right.
We don’t expect most politicians to know budget specifics like how much is appropriated to the Department of Agriculture or what the U.S. spends on foreign aid in any given year. Those are the details; the national debt is in the big picture.
Although a recent U.S. president bobbed and weaved when asked on one of the late-night talk shows how much debt the U.S. had (he didn’t know), most have some idea that it is big and constantly growing. And most people realize that, as with their own family debt burden, it can’t be allowed to grow forever.
Even so, the following graphic, courtesy of Visual Capitalist, suggests that today’s politicians think their job is to spend money and raise the debt ceiling. The debt ceiling has been raised 78 times since 1960. To frame the issue differently, 50 years ago U.S. debt, as you can see, was about 35% of the nation’s total productivity (GDP). Today it is 129% of GDP.
Even if horror isn’t a good description, our sense from following news accounts is that the media is of one mind that a failure to raise the debt ceiling will result in a series of tragedies. Little is said about continual deficit-financed government spending. Rare indeed are voices like the Committee to Unleash Prosperity that seek to weigh what will happen if the debt is allowed to continue growing: “The risk of an economic meltdown comes from the tsunami of debt, which may rise another $2 trillion this year and to $50 trillion by the end of the decade if Congress doesn’t act to stop the bleeding.”
How is the Debt Ceiling Funded?
There are only two ways to fund the debt. The money can be borrowed or printed. Neither option is cost-free. Both are looming disasters. The Fed may stop raising interest rates, but author and journalist John Rubino says that the cost of debt financing is already beginning to burst out of a range that has been abnormally low.
“When the Fed finally does stop raising rates, monetary conditions will continue to tighten for a long time. And not just in the U.S., but everywhere. The world is awash in short-term debt that has to be rolled over. With interest rates now at their highest level in a decade, everything that rolls over going forward will do so at a higher rate. Which means rising interest costs—which is the general definition of monetary tightening. Governments will see their deficits rise in line with their higher interest costs, and corporations will see their profits shrink, just as if the Fed was still raising rates.”
Rubino is describing an interest rate environment that not only increases the cost of debt service but also slows economic activity. This state of affairs, already on our doorstep, spells reduced tax revenue, and increased social spending, and, therefore, an even bigger deficit. It is a vicious cycle.
The other way to fund the debt, printing the money, destroys capital—the savings of generations. It accelerates the flight from the dollar, which of course means the Treasury must offer still higher interest rates to offset the inflation premium that creditors will insist upon. And higher rates mean even more money printing and higher inflation—another vicious cycle.
What’s coming, said a Goldman Sachs trader, “is like when Indiana Jones was running from the boulder.”
Like higher interest rates that are wreaking havoc on banks and surging inflation that so surprised the Fed, the debt ceiling didn’t just appear this month. The U.S. has been up against the $31.4 trillion borrowing limit since January.
China and Japan Are Ramping Up Their Gold Reserves
China doesn’t appear to be especially horrified by all this. It simply watched and added another 8.1 metric tons of gold to its official reserves in April. That is six consecutive months that it has added gold. Meanwhile, its holdings of U.S. government debt are down month after month after month. America’s other leading foreign creditor, Japan, has also cut its dollar exposure, slicing it by 15% in 2022.
Come default, rising debt, more money printing, or a crippling surge in interest rates, China and other countries have chosen the safe haven of gold. Last year was the thirteenth year in a row of net central bank gold purchases. They purchased more than twice as much gold in 2022 as they did in 2021.
We believe that gold is a prudent choice for individuals as well.
If you’re interested in investing in precious metals, let us provide you with a free one-on-one consultation.
Red Rock Disclaimer
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment or tax advice, and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.