Deficits and debt – both public and private – are hot topics in the U.S.A. these days. Not only are many people and businesses struggling with debt, governments are as well, which can have crippling effects on economic stability.
Many analysts in fact see the U.S. National Debt as a big threat to the future viability of the U.S. economy. As of midday today (January 12th), the public debt of the U.S. (including deficit spending and entitlements like Social Security) stands at roughly $14.03 trillion…that adds up to almost $45,000 per citizen.
But what’s the significance of the U.S. debt right now and what are its potential effects on precious metals?
In 1917, the Second Liberty Bond Act established a statutory limit on the federal debt. Before, Congress approved each new issuance of debt. Now, they only vote to raise the limit, which currently stands at $14.294 trillion.
As you can tell, we’re not too far from that limit…in a letter to Congress, Treasury Secretary Tim Geithner says he expects the limit to be reached anytime between March 31st and May 16th.
When exactly that limit will be reached is anyone’s guess. Much of that depends on tax receipts as well as sales of assets acquired in the taxpayer-funded bailouts.
Proponents of raising the debt ceiling – like Geithner – lament that Congress has never failed to raise the debt limit. They contend that not raising the debt limit would be catastrophic for the U.S. economy since holders of U.S. debt would lose confidence in the government to pay its bills and abandon U.S. Treasuries…bond holders are paying close attention to the debate.
But with heightened awareness of the national debt and the burdens it places on the economy, many oppose any increase in the national debt – over 70% of the country in fact.
If Congress doesn’t pass a new debt limit, the government would then have to scale back spending to levels matching the amount of tax revenues it receives. Currently, the U.S. budget deficit stands at around $1.3 trillion so some dramatic cuts would be needed.
In a worst-case the scenario, many federal offices would close and the U.S. Government default on its debts. This would likely cause the U.S. to lose its AAA credit rating and dramatically drive up borrowing costs for both businesses and the government.
While much controversy surrounds this latest debt increase (…likely due to the fact that there have been 10 such increases in the last decade), many expect the debt limit to be eventually raised. What spending concessions may come of this, no one knows yet. Congressional Republicans say that’s their condition to approving an increase in the debt. How far they will go is anyone’s guess but if history is any indication, a debt increase will likely be approved.
What effects does this all have on gold and precious metal markets?
As bond holders nervously eye the closing in on the debt limit, they may feel gold and silver will provide them stability. A breach of the national debt ceiling – with no increase by Congress – would be extremely unsettling in the near term. This instability would boost gold since many view it as a refuge from economic turmoil.
Debt fuels much of the rise in gold prices in the last decade. In fact, there’s an extremely close relationship between the national debt and gold prices. As we’ve seen a near tripling of the debt, so have we seen an over 5-fold increase in gold prices.
If current trends continue, the U.S. Government will incur more debt as spending obligations continue to mount. The current $14 trillion debt is expected to grow another $5-6 trillion this decade. As this all unfolds, gold and other precious metals are thought to offer a refuge by many
Online gold dealer Provident Metals offers many options for protecting yourself in these situations. You can buy gold, silver and other metals and protect you and your family from the effects of the national debt.
