The United States is overflowing with debt. The debt ceiling has been blown off, leaving Congress and investors wondering what to do about it.
The debt ceiling is $16.699 trillion, and that’s nowhere close to what the U.S. really owes. Now, policymakers are frantically searching for money to pay the bills. If they don’t come up with an agreement by October 1, many government services will come to a screeching halt.
This will cause many problems for a lot of people. Many won’t get paid, and when people don’t receive compensation, they don’t work. The consequences of this could send the U.S. economy into devastation.
From the outside, many Americans point fingers at the government. Automatic budget cuts were supposed to be put in place, but they didn’t work in the way they were supposed to. Neither side of Congress wants to endure it. The whole point of it was to make the budget cuts so difficult that they would cause a compromise to reduce the deficit. But it’s just not happening.
Republicans and Democrats can’t seem to come to an agreement on where to cut spending. They both have different ideals and can’t find a middle ground, causing a standstill. The most pressing issues include the budget, economy, immigration reform, and Obamacare.
But something has to be done. The ceiling was blown off in May, and since the, Congress has been employing many “extraordinary measures” to pay bills up until this point. They halted securities to state and local governments, and soon, they will have to stop investing in the short-term retirement bonds for federal workers.
No one is going to be happy about the consequences of the stalemate with the government. If they don’t reach an agreement by the October deadline, the U.S. will default, sending the economy into an incredible storm that could send interest rates soaring, shake the bond market, and boost borrowing costs for the future government.
The Fiscal Cliff Difference
Many people relate the debt ceiling to a fiscal cliff, but they are not the same. A fiscal cliff refers to a decrease in spending and an increase in taxes. The debt ceiling just decreases spending.
While there are serious consequences in spending cuts, there are also ones with the fiscal cliff, including recession and an increase in unemployment.
What the Debt Ceiling Debate Means for Investors
The last time there was a debt ceiling debate in 2011, the stock market went crazy. The Dow Jones Industrial Average decreased 2,000 points. The Dow hit an all-time low after the S&P downgraded and went down 635 points.
Rep. John Boehner talked with the Wall Street Journal about the high level of debt:
When I ask him when the impact of this debt will start to be felt, he says: “It’s already here today. It’s killing our economy. It’s causing investors to sit on their cash. They’re afraid to invest. It’s a wet blanket on top of our economy.”
Boehner has a rule, referred to as The Boehner Rule, which says that for every dollar the debt ceiling is raised, a dollar should be cut in spending. The problem remains where those spending cuts will come from…
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What Investors Should Do
With Republicans and Democrats unable to make up their minds, you’re probably wondering what you’re going to do with your portfolio. You can wait, but with the government’s 5-week summer vacation right around the corner, it’s unlikely they will come to a decision soon.
It’s time start looking towards gold again! Gold is a hard asset that has historically remained relatively steady through economic distress. With gold, you don’t have to worry about your money disappearing before your eyes. You physically hold it. When prices are high, you can sell it.
Gold has seen a slight decrease over the past year, but experts project it to recover. According to Dubai Chronicle, gold has increased $160 from its lowest price in three years of $1,180.71 an ounce. It’s expected to continue to rise:
Traders are now more confident that the downside risk has subsided just a little bit. The message from the US Federal Reserve already outlived its momentum and actually it is not a novelty.
Demand from China remains strong and it is helping offset some of the losses from India where demand has fallen off…China…has been buying consistently, gold dealers have said, pointing to elevated premiums on the Shanghai Gold Exchange.
So if you want to shield your portfolio from the volatility of the U.S. economy that may ensue with the debt ceiling debate, invest in gold.
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