2 Reasons to Be Cautious About the State of the Economy

debt ceiling crisis

As long as the sky doesn’t appear to be falling, it seems as though most people go through life oblivious to the threats facing them. That includes the threats facing their finances as a result of economic headwinds.

A few weeks ago when a few banks started to fail, it looked as though we were due for a repeat of 2008. But now that the threat seems to have abated, most people think that the economy is doing just fine and that the banking system is under control. But is it?

Banks Are Still Troubled

The threat of a systemic banking crisis seems to have dissipated in recent weeks, but it’s hard to say when such a crisis might rear its head again. Foreign central banks have started to wind down their swap lines with the Federal Reserve, as pressure for dollar funding overseas isn’t as needed as it once was.

But US banks remain in rough shape, with total Fed loans to the financial sector remaining elevated, at over $325 billion, roughly the same amount as in the immediate aftermath of the failures of Silicon Valley Bank and Signature Bank. And with First Republic making headlines once again this week for its massive deposit losses, the stability and future of that bank could roil the banking sector as well.

The first rumblings of the 2008 crisis started with Bear Stearns’ weakness in 2007. Federal Reserve and Treasury intervention had Wall Street thinking the problem was contained, but it wasn’t. We could be headed for a repeat of that this time around, as markets lulled by the Fed’s intervention may think that banking instability is behind us when it really isn’t.

As long as the Fed has to maintain accommodative lending to the banking sector, things won’t return to normal. So keep looking at that “Loans” line item on the Fed’s weekly H.4.1 release to gauge just how well the banking sector is doing.

Just because you aren’t reading about things in the news headlines doesn’t mean that they aren’t happening. And now that the media has moved on from the banking crisis to seemingly more pressing current events, it’s on you to keep up to date on what’s happening in the banking system so that you can ensure that your money remains safe.

Debt Ceiling Crisis

The other factor potentially affecting the economy is the upcoming debt ceiling crisis. President Biden and House Republicans are going back and forth on the issue, and the federal government may only have until July or August until it exhausts its emergency measures and faces a real crisis.

Markets are already reacting to the possibility of a default or near-default, with demand for one-month T-Bills driving yields down significantly. The spread between one-month and three-month T-Bills has grown from 20 basis points at the beginning of April to 101 basis points most recently, and at one point it was as large as 183 basis points.

Markets don’t trust that the government will be able to come to an agreement in time, and so bond yields on debt maturing before a potential default are falling as investors pile into them. That’s a shame, because yields on short-term T-Bills today are higher than long-term Treasury debt, offering inflation-weary investors a reasonably safe place to park short-term cash.

What’s being signaled by this, however, is that markets are worried about the effects of not coming to an agreement soon. Let’s face it, as much as we would like the federal government to become disciplined in its spending, that isn’t going to happen.

The government has no plans to actually stay within the confines of the debt limit, especially not in the short term. The debt limit will be raised, the only question is what political concessions the Biden administration will offer in order to get it raised, and by how much the ceiling will be raised.

In the meantime, however, the political hardball being played in Washington is making markets nervous. Markets like to see certainty, particularly over the long term, and the prospect of a debt ceiling crisis in the near term is disconcerting.

It’s also a potential problem when it comes to the banking sector because there’s no telling what might happen to the value of the bonds those banks hold. The problem with Signature Bank, SVB, and others was that the market value of the bonds they held declined as interest rates rose, leaving them insolvent.

As the Fed continues to raise the federal funds rate, the value of remaining bonds declines. But the debt ceiling crisis could impact bond rates even more severely. Risk of default or fear of default could cause interest rates to spike on many Treasury bonds, as investors sell them to reduce their exposure in the case of a bond default.

That could further erode the financial positions of banks that are already in a difficult position, and make it harder for those banks to weather the effects of deposit outflows. And that could come within the next couple of months if Congress and the Biden administration can’t come to terms soon on a debt limit increase.

Protect Your Wealth

It’s no wonder, then, that so many Americans are worried about protecting their wealth. Many remember 2008, and how the value of their investments fell by over 50%. They remember the weakness in the financial system and how close many thought we were to complete collapse. And they don’t want to have to go through that again.

As a result, thousands of Americans are taking steps to protect themselves by diversifying their portfolios. And one way they’re doing that is by investing in precious metals like gold and silver.

Gold and silver have served as safe haven assets and stores of wealth for centuries, and their ability to maintain value over the long run helps them retain their popularity even today. It’s no surprise that during times of turmoil and uncertainty, such as the 2008 financial crisis, COVID, or the banking crisis, savers and investors often turned to gold and silver to help protect their financial assets.

If the economy ends up falling into a severe recession, gold and silver could end up repeating their post-2008 performance, when gold pushed to record highs. Many savvy Americans are trying to position themselves today to take advantage of the potential for future price growth of gold and silver, whether through a gold or silver IRA or through direct cash purchases of precious metals.

With over $1 billion in precious metals placements and thousands of satisfied customers, Goldco has numerous gold and silver options available if you’re looking to buy precious metals. Call Goldco today to find out how you can help safeguard your hard-earned savings with gold and silver.

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