Budget Issues Return To Spotlight As Next Debt Ceiling Circus Looms

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Published : February 14th, 2018
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Category : Opinions and Analysis

Judging by the fact that you’re reading this, at some point you have probably been concerned about the financial condition of United States government.

The publicly stated debt is now over $20 trillion, while Boston University economist Laurence Kotlikoff pegs the cost of unfunded liabilities at over $222 trillion! Not exactly ideal in an $18 trillion economy. And if there’s an accountant out there who can explain how it’s even feasibly possible that the debt could ever be repaid without default, I have yet to find him.

The political climate is more divisive than ever, with attempts to even come to agreement on how much to raise spending resulting in government shutdowns. And now the treasury is once again reaching the debt ceiling limit.

Which in many ways has already been turned into a complete circus, as every time the limit is reached, it’s just raised. Which kind of defeats the purpose, doesn’t it?

Of course it’s always fascinating to see the mainstream perspective on the matter.

The upcoming battle over the debt ceiling could have a big impact on the market, CNBC’s Jim Cramer said on Tuesday.

“We really hate any debt ceiling issue which makes it so that the government would even seem for a second that it would default,” the “Mad Money” host said in an interview with MSNBC’s Chuck Todd.

Makes it so that the government would even seem for a second that it would default?!!! Are we both referring to the same government?! That’s like saying that Bernie Madoff’s Ponzi scheme was not really in default until it finally collapsed.

As Peter Schiff so appropriately pointed out during the 2011 debt ceiling debacle, the fact that you refuse to pay your creditors unless you’re allowed to go deeper into debt is the exact definition of a Ponzi scheme. Ironically on his way to jail, even Madoff said, “the whole government is a Ponzi scheme.”

Schiff was also wise to point out how the government is not in default because it does not raise the limit. It could reach the limit, and actually spend within its means without going further into debt. It’s only the refusal to actually continue borrowing additional money that turns the implicit default into an explicit one.

In other words, what it really comes down to is a refusal to balance the budget.

Failing to raise the borrowing limit ultimately could cause the U.S. to default on debt payments. That would send a ripple effect through the economy, causing government bond yields to surge. It would also result in soaring borrowing costs when government debt loses its sterling credit rating.

Speaking as someone whose first job out of undergrad was a two year stint with rating agency Moody’s back in 2001–2003, I can say firsthand that I would be careful about putting too much stock into anything you hear from the rating agencies.

Moody’s still rates U.S. Government debt with its highest Aaa rating. Which is essentially stating that it’s simply not possible to have a better credit profile. Despite that outside of hyperinflating the currency (which would really be a form of default in its own right) there’s no mathematically possible way that the treasury doesn’t eventually default.

To Cramer’s point that an overt default could send a ripple through the economy and cause yields to surge, that’s very likely true. Yet whether it happens this March or 15 years into the future, if the limit just keeps getting raised, one way or another, it’s clear what’s coming.

Sometimes it’s easy to lose track as the years pass by. But keep in mind that the historic S&P downgrade of U.S. debt back in 2011 is now seven years ago! And the only thing that has happened since then is that the limit has been raised each time it has come up.

So while Cramer may find it inconceivable that there’s any remote possibility that the government’s credit worthiness could come into question, the evidence supports it as an inevitability.

Worth considering is that Donald Trump does have extensive experience with the bankruptcy code. And given the growing evidence that he might well be part of a concerted effort to take down the deep state, it has to be a non-zero probability that he might actually consider just canceling the debt.

Either way it will be fascinating to see how it unfolds. And I continue to believe that if you have gold and silver as opposed to dollars and treasuries, the economics are in your favor.

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Andrew Hoffman was a buy-side and sell-side analyst in the United States (including six years as an II-ranked oilfield service analyst at Salomon Smith Barney), but since 2002 his focus has been entirely in the metals markets, principally gold and silver. He recently worked as a consultant to junior mining companies, head of Corporate Development, and VP of Investor Relations for different mining ventures, and is now the Director of Marketing for Miles Franklin, a U.S.-based bullion dealer.
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