Over the last decade, it seems to only need two years (odd calendar years) for the United States to runs afoul of its own self-imposed debt ceiling. This kicks off an all too familiar battle-royale to see which governing party will blink first. There are never any winners in this ongoing dangerous game of chicken the Democrats and Republicans play bi-annually. Only last week, the ghosts of the past budget crisis resurrected themselves once again.
Now rumors have emerged that the long-secret plan that the Obama Administration wrote back in 2011 has been seriously considered once more. The plan has lain dormant and hidden deep in the vaults of the Treasury Department with good reason. If activated, it might finally cause the very first U.S. debt default. Even bond traders have become seriously concerned that the Treasury secretary Steve Mnuchin may at last be forced to use the controversial plan.
Speaking of contingency plans, now might be the ideal time to get your Gold IRA backup plan operational. This starts by learning what gold goes in an IRA. Gold is your best hope to save your retirement assets’ value in case of an unanticipated Black Swan-like event emerging from this sadly classic beltway-based political infighting.
U.S. Government Nearing its Statutory Limit for Borrowing Again
The CBO Congressional Budget Office has stoked the age-old debate about how to keep the government debt paid by sharing its estimate that the American government is set to breach its legal debt limit this October. Naturally neither party really wants this to occur. To that effect, Trump’s administration has requested Congress to hike up the ceiling again in advance of the financial impasse.
Yet once again, the same thorny issues that stymied President Obama years ago on multiple occasions (like 2011, 2013, 2015) have reared their ugly heads before President Trump’s first turn at the never ending story of the debt ceiling debacle. This is the same generally Republican congressmen who are seeking to deploy the debt limit missile crisis as a means of obtaining leverage for enacting policy changes that remain controversial.
So you can sleep easier at night, you should be aware that per Steve Mnuchin, erstwhile Treasury Secretary of the United States, both “plans and backup plans” exist with the sole purpose of maintaining the solvency of the American Federal government through September. Yet this is most likely a direct reference to the 2011 Obama administration preparations to stave off Federal debt default.
The Details of the Secret Treasury Plan Revealed
The much-feared plans that bond traders and observers alike continue to make reference to were created with the intent of ensuring that government securities’ payments would continue to be made at any and all costs. They would accomplish this by engaging in what Treasury refers to as “prioritization.” This innocent enough sounding word means that Treasury would first pay all government securities’ interest payments ahead of all other bills and responsibilities.
These plans were top-secret until January. This is because official transcripts from Federal Reserve and Treasury conference calls remain classified until a traditional five year time period has elapsed. Since the infamous contingency plans were first discussed on this August 1st of 2011 conference call when the country nearly defaulted on its past obligations, it meant that they were not considered public domain until the beginning of this year.
It was only the day before the gut-wrenching last minute negotiations in Congress finally lifted the debt ceiling when officials at the central bank, the Federal Reserve staff, became briefed on the means that the Fed leadership and the Treasury heads had come up with in a plan to ensure debt repayments were made in case they needed to be “prioritized or at least not fully paid.”
Prioritizing Would Set A Perilous Precedent for the United States Federal Government
Chief Economist Lou Crandall of Wrightson ICAP LLC rightly called this prioritization:
“A truly terrible idea. I’m assuming that prioritization is the fallback.”
There are a variety of reasons why this series of actions would be dangerous for the American Federal government. While such policies would ensure that a technical default would not occur (at least on federal debt holders), the government would in fact be de facto defaulting on other parties to whom it owes money on a regular basis. The groups who would be protected include debt holders, social security recipients, entitlement recipients, and veterans.
It is everyone else to whom the government owes money who would be left out of the Federal expenditures gravy train. This includes U.S. government employees and government contractors. All of these groups would likely receive either partial or delayed payments.
The problem with the plan is that the government’s reputation would likely suffer irreparable harm as a direct result of it not paying its other bills and financial obligations to its own employees. Companies and corporations that engage in this behavior are called bankrupt. This chart shows the dangers from the past episodes of this risky game:
This could still cause the value of U.S. Treasury Bills and Bonds to decline substantially as a result if the government’s creditworthiness suffered from one or more credit downgrades. This actually happened for the first time in 2011. At this humiliating and expensive moment, American debt suffered its first of all-time downgrade, from credit ratings agency S&P Global Ratings.
Many analysts opine that the top-secret debt prioritization emergency plans would cause the national credit rating to fall again and further if the Trump Treasury is forced to activate it. Citigroup’s Interest Rate Strategist Steve Kang is one who shares this opinion on the 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.”
Though Steve Mnuchin the present Treasury Secretary did originally claim in his January confirmation hearings before Congress that he would not elect to prioritize payments, he has since dodged the issue, with these words of warning:
“Congress should raise the ceiling so that we don’t have to talk about prioritization.” The United States “should be paying our bills when they’re due and we shouldn’t put the government at risk.”
Such Prioritization Can Still Be Called Default by the Sovereign Ratings Agencies
So Treasury would save up money by not paying its “secondary obligations” to employees and contractors. They would use this money in order to pay all of their semi-annually occurring coupon payments. Then as old debt matured and needed to be retired, the Treasury would auction a corresponding amount of new debt to fund the then- maturing and -due bonds and bills.
The U.S. came so close to this in 2011 that the American central bank was running “tabletop exercises” to demonstrate that their contingency plans would work back in March of 2011. This information emerged from the Federal Reserve records which were outlined in the House Financial Services Committee report from 2016.
The real concern is that a consensus does not exist among analysts regarding whether or not the prioritization would be considered a Federal government default or not. Prior Treasury Secretary Jacob Lew (while still serving in the post) has referred to the idea as “default by another name.” Fitch Ratings claims that such an event would in fact trigger a full review on if the United States still deserves its coveted AAA rating from the ratings agency.
Moody’s Investor Service on the other hand appears to be comfortable with the actions this would entail. Their reasoning is they believe it would be highly likely that sufficient pressure would build up on Congress to act as the Federal employees and contractors went unpaid and economic chaos erupted. Meanwhile, Moody’s is confident that Treasury would enact their plan once their extraordinary measures finally became exhausted. But as Crandall of Wrightson has so astutely put it:
“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.”
You Will Not Be Able to Acquire Gold Fast Enough If Treasury Activates the Prioritization Plan
One thing you can be sure of in all of this political infighting mess. With the so-called path forward still murky, you will not be capable of obtaining gold fast enough at a price you can stomach if Treasury stops paying its obligations to American employees and businesses over the next two to three months.
Could this really happen? Congressional conservative Republicans are insisting on deep cuts to spending in exchange for their votes to lift the debt ceiling yet again. Democrats would be required to ensure the vote passes, and they have already pledged to reject these kinds of spending cut conditions. All that you need to understand really is that gold offers insurance and protection during market turbulence. So now you know why you should own gold in times of financial crisis. It’s not too late to learn how to invest in gold now while you still can afford it.