How many times has the U.S. government set some arbitrary debt ceiling only to exceed it quickly? Over the last decade it usually only takes about two years to surpass its own “line in the sand.” Interestingly this usually happens on odd calendar years. Since elections happen on even calendar years, whichever party is in power will kick the can down the road and exceed the debt limit on non-election years. Rather than dealing with budget problems realistically the government continues to spend and print money so the economy appears to be functioning well. The sad reality is that this little game that Republicans and Democrats are playing will have a catastrophic effect on the entire nation and the world as well.
Rumors are emerging that a secret plan written by the Obama administration in 2011 is once again being considered. This plan has remained dormant within the confines of the Treasury Department and for good reason. If this plan were activated it could very well cause the first U.S. debt default. Not that anyone wants to use the plan, but even bond traders are becoming seriously concerned that the Treasury Secretary, Steve Munchin, may be forced to use this controversial plan.
If the U.S. government is considering a contingency plan, this might be a signal that you should be considering one as well if you wish to preserve your wealth. The debt ceiling will have to be confronted one of these days, and the results will cause paper-based securities to fall. The best hedge against such a catastrophic event is a gold IRA or some form of a precious metals IRA. Holding gold is your best hope to preserve your retirement in case of some unanticipated Black swan event that could very well emerge from the irresponsible actions of both political parties.
U.S. Government Nearing its Statutory Limit for Borrowing Again
Once again the Congressional Budget Office (CBO) has rekindled the ongoing debate regarding how to keep the government debt paid. They did this by sharing its latest estimate that coming this October, the U.S. government is set to surpass its legal debt limit, which neither Republicans nor Democrats want to occur. In advance of the government breaching the debt limit, President Trump has requested that Congress hike up the debt ceiling once again, as have previous administrations.
As President Trump takes his turn at facing the debt ceiling problem he is faced with the same difficult issues that confronted President Obama in 2011, 2013 and 2015. The difficulty falls on Republican congressmen who using the debt ceiling crisis as a means of leveraging the situation to enact policies that are somewhat controversial.
However, you can take comfort in knowing that the Treasury Secretary, Steve Munchin, has a plan to deal with the debt ceiling problem. Not only does he have a plan, but he has a backup plan as well. This is essentially the same plan the Obama administration considered in 2011.
Secret Treasury Plan Revealed
Bond traders and other observers fear these plans as they continue to make reference to them though they have the intent of ensuring that government securities payments are paid and will continue to be paid at all costs. The term used to accomplish this is “prioritization.” Essentially this means that the Treasury would pay all government securities interest payments, which is the first priority above all other bills and responsibilities.
Until January of this year, these plans were top-secret. The reason is that the official transcripts from conference calls between the Federal Reserve and Treasury remain classified for a five year time period. When the five year period has elapsed they become public knowledge. This contingency plan was first discussed on an August 1, 2011 conference call when the U.S. Government nearly defaulted on its past obligations. Therefore, they were not considered public domain until January of this year.
Just the day before last minute negotiations were finalized in Congress for lifting the debt ceiling were they briefed on the plan that the Federal Reserve leadership and Treasury heads had developed to deal with debt repayments.
Prioritizing Would Set a Dangerous Precedent
Lou Crandall of Wrightson ICAP LLC and Chief Economist correctly called this prioritization:
“A truly terrible idea. I’m assuming that prioritization is the fallback.”
There are several reasons why “prioritization” is a bad idea and dangerous for the U.S. Federal Government. Technically this would be a deterrent to a default occurring, at least on federal debt holders. However, the government would be defaulting on other parties to whom it owes money on a regular basis. Groups that would be protected include debt holders, entitlement recipients, social security recipients and veterans.
Everyone else that is owed money by the government would be left holding the bag. This blessed group would include government contractors and government employees as well. Most likely, these groups would receive partial or delayed payments.
The big problem is that the government’s reputation would take a big hit and it would likely suffer irreparable damage. When you fail to pay your own employees in addition to other bills and financial obligations the trust element is lost. Furthermore companies cannot abate their bills like the government and they will suffer greatly from them not receiving the money that is owed. This could send many companies into bankruptcy. Furthermore, why would a company place themselves in such jeopardy?
Furthermore, if “prioritization” were to become a reality it could send the value of U.S. Treasury Bills and Bonds in a downward direction. The reason is that the government’s creditworthiness would suffer from a potential of one or more credit downgrades. This is not really a potential, but in fact a reality as it happened for the first time in 2011. Not only was the event humiliating but expensive as the American debt experienced its first downgrade from credit ratings agency S&P Global Ratings.
If the Trump administration is forced to implement the previously top-secret “prioritization” plan the thought is that it would cause the credit rating to fall again and further than before. Steve King, Citigroup’s Interest Rate Strategist, is one who shares this opinion of ultimate outcome:
“Using prioritization would set up a dangerous precedent. If Treasury goes to it, then people are probably going to bake in another prioritization two years, three years down the line when the debt ceiling issue comes back. It wouldn’t bode too well.”
Originally Munchin (Treasury Secretary) claimed in his January confirmation hearings before Congress that he would not choose to prioritize payments, However, he has since evaded the issue and added these words of warning:
“Congress should raise the ceiling so that we don’t have to talk about prioritization.” Referring to the United States he said that we “should be paying our bills when they’re due and we shouldn’t put the government at risk.”
Independent Ratings Agencies Can Still Call Such Prioritization Default
By not paying secondary obligations to employees and contractors the Treasury would save up money. In turn, they would use these saved up funds to pay all their coupon payment semi-annually. Then as the old debt needed to be retired upon maturation, the Treasury would auction a corresponding amount of new debt to fund the old debt of bonds and bills. The U.S. came close to this in 2011 as it was revealed in the House Financial Services Committee report from 2016.
Furthering greater concern is that there is no consensus among analysts regarding whether or not “prioritization” would be considered a Federal government default or not. Jacob Lew, prior Treasury Secretary and while serving in this post, referred to the idea s “default by another name.” Such an event, as claimed by Fitch Ratings, would trigger a full review of the United States AAA rating from this particular agency.
On the other hand, Moody’s Investor Service appears to be comfortable with the resulting actions of “prioritization.” The reason is that they believe it would be highly unlikely that the government would default on payments to employees and contractors because of the pressure Congress would face. If they did withhold payment, again the pressure would become so intense that they would quickly implement a real plan to deal with the problem. However, Crandall of Wrightson astutely stated:
“Proposing to pay interest to the Chinese first, while stiffing American businesses and households that are owed payments by Treasury, hardly seems like a winning political strategy. We’re not sure how the market would respond to that kind of payments twilight zone.”
If This Happens You Will Not Be Able to Acquire Gold Fast Enough
If the Treasury stops paying its obligations to its employees and contractors you will not be able to buy gold fast enough. This is why it is important to consider a gold IRA or precious metals IRA to be part of your retirement plan. If you want your wealth protected you need to act now rather than later and have a percentage of your financial portfolio in precious metals.
Could this really happen? The answer is “yes” as the credit rating of the United States has been negatively affected once before. If it happened in the past it can certainly happen again. The best course of action for your retirement portfolio is diversification.
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