By Stefan Gleason, Money Metals Exchange
U.S. government agencies could run out of operating funds starting on midnight this Friday, December 7th. At issue: President Donald Trump’s proposed border wall. He wants Congress to commit $5 billion for construction of a wall along portions of the U.S.-Mexico border. The migrant caravan that recently attempted to crash the border near Tijuana has helped rally Republicans to support his request. It may be now or never for Trump’s wall. In the next Congress, presumptive House Speaker Nancy Pelosi will be able to kill any of Trump’s legislative priorities. At present, Trump faces obstacles in the Senate, where Democrats seem intent on blocking wall funding. If both sides can’t agree to a spending bill by Friday, then a partial government shutdown could ensue.
Government shutdowns have become almost routine in recent years. So have the short-sighted political resolutions that raise debt ceilings and grow budget deficits. The true budgetary crisis facing Washington isn’t the threat of another shutdown, but the threat of business as usual resuming in Congress. The outgoing GOP majority proved that no matter which party is in charge, federal spending keeps growing unsustainably. When Democrats take power next year, you can bet spending restraint won’t make their list of priorities – especially since a new crop of avowed socialists (see Alexandria Ocasio-Cortez) will be seated among their ranks. Even if the next Congress miraculously pares down the $1 trillion budget deficit it is projected to run, the government will still face a massive surge in debt coming due.
Almost nobody is talking about it now, but trillions of dollars in Treasuries will soon have to be rolled over. Bombshell GAO Report Puts Treasury Bond Holders on Notice. The Government Accountability Office (GAO) delivered some dire projections in its 2018 audit of federal debt, released last month, According to the GAO, more than $9.2 trillion in marketable Treasury securities currently held by the public will mature in the next four years. That’s a whole lot of debt coming due! In fact, it’s 2.7 times as much debt compared to 10 years ago, when a much more manageable $3.4 trillion was slated to mature in four years.
To make matters worse, interest rates are trending higher. Yields on the 10-year Treasury note currently come in at just over 3% – not particularly high historically, but much higher than they were a couple years ago when they spent most of 2016 below 2%. Shorter-term rates, meanwhile, continue to get pumped up by the Federal Reserve. The 1-year Treasury now sits at 2.7% – its highest level in a decade. The overnight Federal Funds rate set by the Fed also comes in at a 10-year high, 2.25%. Fed officials seem intent on taking their benchmark rate up to at least 3.25% in 2019. Whether they’ll get there remains to be seen.
But if they do, it will pressure Treasury yields higher and increase the government’s borrowing costs. The $9.2 trillion coming due in the next four years can’t be paid down and retired, of course. It will instead get rolled over. The Treasury Department will issue new debt at whatever the prevailing interest rates are. The Trump administration wants interest rates to come down, but the bond market may have other ideas. The buyer of last resort for U.S. Treasuries is the Federal Reserve. Fed officials would rather not be in the business of monetizing Congressional excesses. But their calls for Congress to rein in the deficits have fallen on deaf ears and will likely continue to do so.
Printing More Money Is Something EVERYONE in Washington Can Agree On
Big spending politicians know the Fed ultimately won’t let the U.S. Treasury default on its debt. That’s why politicians don’t feel any particular pressure to tighten their belts. That’s the moral hazard created by our fiat monetary system. If the Fed embarks on a new Quantitative Easing program to support the Treasury market and cover trillions in unfunded/unpayable government liabilities, then the big risk will be to the value of the U.S. dollar. There is no upper limit to how much the currency supply can be expanded. By contrast, gold and silver supplies are strictly limited by nature and the high costs of extraction.
According to metals analyst Steve St. Angelo, the total value of all gold and silver mined in 2018 comes to $151 billion. That’s less than one-fifth of the federal budget deficit for fiscal year 2018 ($779 billion)…and a miniscule fraction of the $21.7 trillion official national debt. If only 1% of investor holdings in Treasury securities were to flow into physical precious metals for protection against dollar debasement, demand would overwhelm supply and push gold and silver spot prices much higher. It may not happen overnight. But as investor affinity for holding dollar-denominated government IOUs wanes, it should happen over time.
Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.