With a debt of over $28 trillion and counting, you would think that the federal government would realize that it has a spending problem. Yet every time there’s a crisis surrounding the national debt, the solution is never to cut government spending, it’s always to make it even easier to spend even more money.
For most normal people, coming up on your credit limit would mean cutting your spending. But the federal government never does that. Rather than cutting spending, the federal government tries to keep borrowing.
Imagine that you reach the credit limit on your credit card. And you tell the bank that you need to raise your credit limit. What do you think the bank is going to say?
Unfortunately, Congress doesn’t have the good financial sense or discipline of a sound banker. So it keeps raising the debt limit. And unfortunately again, markets haven’t acted like good bankers either, as investors continue to give the federal government trillions of dollars by buying up new Treasury bonds.
At some point, however, market discipline will reassert itself and Treasury bonds aren’t going to be seen as the modern gold standard of investing. Interest rates will rise, prices will drop, and investors who placed their trust in the full faith and credit of the United States government will discover the hard way just how misplaced that trust actually was.
The Risk of Default
The current drama over the debt ceiling could be the spark that precipitates just such an occurrence. Everyone assumes that Congress will come to an agreement at the last minute. But what if it doesn’t?
The Biden administration is asking Congress not for an increase in the debt limit but rather a suspension of the debt limit until some point in the future. After all, the federal government spends so much money nowadays that it’s impossible to tell just how much the debt limit should be raised.
We’ve had two consecutive fiscal years with deficits over $3 trillion. No one could have predicted that kind of spending, which is why Democrats want the debt limit suspended, not just to have a higher debt limit.
Of course, the real reason they want the debt limit suspended is because it makes it far easier to spend money if President Biden’s $3.5 trillion spending bill passes. They would have far more breathing room in that case, versus a mere $1.5 trillion increase in the debt limit, which would have them coming back to Congress begging for more money likely in a matter of months.
If Congress doesn’t agree to a suspension of the debt limit, it could technically lead to a default. As much as the press likes to say that the US has never defaulted on its debt obligations, that’s not true.
The last tranche of Liberty bonds that came due in 1934 wase supposed to have been redeemed in gold. But because gold ownership had been banned in early 1934, the government refused to pay out those bonds in gold. Nor did the government take into account the devaluation of the dollar, as the value of gold had risen from $20.67 per ounce when the bonds were issued to $35 an ounce in 1934 by executive fiat. That was a default.
In the modern era, there has never been an outright default on Treasury debt. So if it were to happen this time around, it would be unprecedented. It would definitely be a warning sign to investors that Treasury bonds could no longer be considered an ultra-safe and nearly risk-free asset. And it would send shock waves through financial markets and through the economy.
Other Possible Scenarios
Everyone expects Congress to come to some sort of agreement over the debt ceiling. There’s always a huge amount of drama, back and forth blaming, and hyperbole. But at the end of the day no one in Washington wants to see the debt ceiling actually stick. They all want it to expand forever.
At some point, though, markets are going to tire of this behavior. They’re going to come to the realization, no matter how belatedly, that they’re engaging in a highly risky game of musical chairs. Investors in Treasury bonds need to know that the US government won’t ever pay down the principal on its debt. It will only pay the interest, and it will do so in ever more worthless US dollars, dollars that are devalued more and more each year through inflation.
At some point this lesson will make its way through to a large enough group of investors that markets will no longer reflexively purchase Treasury debt whenever they seek safe assets. And this current debt ceiling crisis could be the impetus that forces that lesson to hit home.
If you’re an investor in Treasury debt, particularly if you’re nearing retirement, can you really be on the edge of your seat every other year wondering whether the government will default on its debt? Doesn’t that defeat the purpose of investing in a supposedly “safe” asset?
Eventually enough investors are going to tire of this drama and switch to actual safe assets like precious metals. And many have already made that switch.
Gold, Silver, and Safety
At the end of the day, the ability to put your hands on a tangible asset carries a great deal of weight with many investors. And the fact that gold and silver can’t ever default carries a great deal of weight too.
If you’re looking to protect your retirement savings, rolling over assets from a 401(k), IRA, TSP, or similar account into a gold IRA could help diversify your portfolio and reduce your exposure to the risk of a government debt default. And if you’re just interested in buying gold and silver coins or bars to store at home, there’s nothing wrong with that either.
After all, a bird in the hand is worth two in the bush. And a valuable asset that’s highly liquid, highly in demand, and that often gains value during times of economic crisis or uncertainty could be as close to a risk-free asset as you’re going to find in the world today.
But don’t wait until the threat of government default grows closer to reality than theory. Call the precious metals experts at Goldco today to learn more about how gold and silver can help protect your hard-earned savings.