America to Default on Its Debt?

Live long enough, the amorphous “they” say, and all your predictions will come true.

Apparently, I didn’t have to wait so long…

And so we begin today’s dispatch with a headline from Monday on CNBC…

There’s a phrase that Congresschimps always throw around when talk of the debt ceiling rolls around: “The full faith and credit of the United States government.” It’s the spin-doctory idea that America never welches on its debt and that it’s a huge risk to America’s financial future to do so.

Well, guess what, dear reader?

That headline above is the United States government welching on its debt.

It is, in a word… a DEFAULT!

So much for full faith and credit.

When one country forces its bondholders to accept lower interest rates on existing debt, that’s a default—no different than Argentina or some other financial basket-case country having to restructure the debt it can no longer afford to pay.

That’s what that headline implicitly states: Uncle Sam cannot afford his debt anymore, so he needs to restructure it so that the interest rates he pays are lower.

I’ve been warning for years now that this day was likely… that America had very few options for dealing with its extreme debts, and that a default was probably going to happen in some fashion.

And here we are.

Of course, this is not a done deal yet.

The debt restructuring is part of what Trump is fashioning as the “Mar-a-Lago Accord”—a multi-piece agenda that, at its core, aims to re-industrialize the US by sharply weakening the dollar with the aim of bringing manufacturing back to America.

A weak dollar would mean American goods are more competitively priced overseas, and it would reinvigorate the middle class at home by increasing manufacturing jobs.

All laudable goals, no doubt.

But there are side-effects.

First, out the window goes trust in the US government’s “full faith and credit” malarky. Which is good. The US has been living a lie for nearly a century now.

When FDR repriced gold higher in 1934, that was a default since bonds at that time were repaid in gold—and suddenly their value was less with the repricing. And when Nixon took the US dollar off the gold standard in 1971, that too was a default since it repriced the dollar lower.

Uncle Sam could now have trouble selling as much debt as he needs to sell because buyers will rightly assess that America is now a much bigger financial risk. Once the US establishes that it’s willing to force debt-restructuring onto its bondholders, you’ve broken the seal and there’s no way to put that genie back into the toothpaste tube.

Would-be bond buyers will simply avoid US Treasury auctions, or, ironically, they’ll demand higher interest rates for the risk they’re taking on in a country that has made it clear through forced restructuring that it cannot afford higher interest rates.

We’d also be looking at, potentially, the dollar’s loss of reserve currency status since the buck would no longer be the strong currency the world looks up to. It would become just another currency in hamper of dirty currencies that have been stained by default.

And while a weak dollar would help US manufacturing, it would introduce higher inflation into the economy as well.

Everything we import would suddenly cost more dollars, and that would flow through to consumers and businesses that buy/rely on imported goods.

Note: No—we cannot produce in America everything we need, which is the argument too many people reflexively fall back on. The US, for instance, cannot grow enough coffee beans to supply all the Cup-o’-Joe joints around the country… nor enough bananas for one of the world’s top consumers of monkey fruit… nor mine enough manganese for the steel industry… nor enough uranium for the nuclear power plants in America… nor on and on and on…

The US economy is part of an interconnected/interdependent circle of resources and production. We step out of that circle and try to go it alone, and all hell breaks loose in the US.

One benefit/disaster: Congress’ fight over the debt-ceiling would become an absolute Mad Max Thunderdome death match. High entertainment value for sure… but if the US does restructure the debt, then there is absolutely no argument to be had about “protecting the full faith and credit.”

Which means that extreme fringes of government will absolutely shut down the government until they get their way on spending cuts. They’ll have zero to lose and those out to protect spending will have zero leverage.

So, you can expect massive cuts and rejiggering to social safety nets.

It will get “U G L Y, you ain’t got no alibi, you ugly!”

Thanks, El Jefe! Way to ruin my week with all this darkness. What’s my takeaway?

Buy gold.

Buy lots and lots of gold.

A weak dollar is great for gold.

Inflation is great for gold.

America in technical default is great for gold.

The fear that all of this engenders domestically and globally is great for gold.

(Also, you might want to read the upcoming April issue of Global Intelligence. It will be all about this; and it will offer another way to profit from America’s debt-restructuring, and to earn a non-dollar income in the process.)

I’ve been saying for years that this day was coming. And now the Trump administration is telling the world that El Jefe had the answer all along.

It’s not a done deal yet—the Mar-a-Lago Accord has not happened.

But it’s coming.

That headline is the administration alerting the world to the turn that’s up ahead.

Buy. Gold.

Thank me later.