Looming Debt Ceiling Deal to Leave Dollar Locked in Downtrend

As the debt ceiling fight in Washington heads down to the wire with the risk of a technical default looming, investors are growing nervous.

Some are fleeing to physical precious metals as a safe haven from risky financial assets. But on the futures exchanges that determine spot prices, a wave of selling took place this week.

Metals markets have been soft in recent weeks in part because of a rise in the U.S. Dollar Index. It makes little fundamental sense for the currency of a country that is facing insolvency to be going up in value. But when traders seek liquidity, they go into cash. And in the event of a panic out of the U.S. Treasury market, demand for cash would surge – at least temporarily.

On Wednesday, the rating agency Fitch put the U.S. government’s credit on “Rating Watch Negative.” That means it is on the verge of being downgraded.

Of course, U.S. Federal Reserve notes are themselves no safe haven from U.S. debt obligations.

The government owes tens of trillions of dollars that it currently cannot repay. But it conveniently has the ability to borrow new currency into existence in order to service all of its existing debt. The only question is whether there will be a political agreement on authorizing new borrowing.

Absent a debt ceiling deal, we could see emergency power grabs by the Treasury department, working in conjunction with the Federal Reserve, to fund the government. One way or another, the government will get the cash it needs to stay afloat.

Even if some sort of technical default is triggered by the debt ceiling impasse, the odds of an actual default on Treasury securities remain low. Wall Street funds both major political parties, and it wouldn’t stand for it.

President Joe Biden and Speaker of the House Kevin McCarthy are arguing over a few billion dollars in spending priorities – which is pennies relative to the size of the entire federal budget. They each just want to save face.

Whatever agreement is ultimately reached to raise the government’s borrowing limit, the debt problem itself won’t be solved. It will only get bigger.

At root, the debt problem is a monetary phenomenon. The currency in which debts are owed is itself a debt instrument.

U.S. Federal Reserve notes are backed by nothing but faith and credit. Since they do not represent anything tangible, such as a particular quantity of gold or silver, they can be issued in unlimited quantities.

Even as the financial media and the U.S. Treasury Secretary herself play up the threat of a potential debt default and the economic calamities it would bring, the reality is that the federal government has already defaulted. It defaulted decades ago – on August 15, 1971 to be exact – when President Richard Nixon declared the United States would no longer redeem dollars held by foreign governments for gold.

Since then, the national debt has exploded from a mere $400 billion to $32 trillion. In the process, the dollar has defaulted on its purchasing power by 87%. It takes $7.50 today to buy what $1.00 could buy in 1971.

The default instead has been, and will continue to be, as default on the real value of the currency.  The most dishonest form of debt default is a default via inflation.

By contrast, an ounce of gold retains much the same purchasing power today as it did 50 years ago.  It has done so by going up several fold in terms of U.S. dollars. 

Unlike debt-based fiat currency, gold isn’t an IOU. It doesn’t have an issuer and cannot default. It is honest money.

Unlike politicians, bankers, and bureaucrats, gold is uncorruptible.

On the sound money policy front, we’re pleased to report that thousands of Money Metals customers in Louisiana – responding to our calls to action – appear to have successfully blocked a foolish ploy by some politicians to sunset the state’s sales tax exemption for gold and silver. 

Money Metals will remain vigilant to detect such schemes across the country – and we will alert our customers accordingly so they can assist us.

Meanwhile, an extremely tense battle just came to conclusion in Maine.  The Democrat-controlled legislature engaged in a bunch of 11^th hour arm twisting to stop our prospective new sales tax exemption there.  Ultimately the Democrat leadership in Maine mustered the one vote they needed in the House -- and two votes in the Senate -- to kill the bill.

Money Metals customers in Maine played a critical role in lobbying their representatives in support of the bill. There is no way this sound money legislation in Maine would have come so unexpectedly close to passage this year without their help.