Looming Debt Ceiling Deal to Leave Dollar Locked in Downtrend
The comments below are an edited and abridged synopsis of an article by Mike Gleason
As the debt ceiling fight in Washington continues 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 gold, silver and platinum selling took place last week.
Metals markets have been soft in part because of a rise in the US dollar. It makes no sense for the currency of a country facing insolvency to be going up in value. But when traders seek liquidity, they go to cash. And in the event of a panic out of US Treasuries, demand for cash would surge, at least temporarily.
Fitch put the US government’s credit on Rating Watch Negative last week; that means it is on the verge of being downgraded. Of course, US dollars are no safe haven from US debt obligations.
The government owes tens of trillions of dollars that it currently cannot repay. But it 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, there could be emergency power grabs by the Treasury department, working with the Fed, 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.
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.