Source: BullionStar – The US is teetering on default
Many people recognize the major role the US plays globally. They see her as a military superpower, a giant in the technology and creative industries (think Apple, Google and Hollywood) and the issuer of the foremost world reserve currency. But of late, people are starting to hear news of the US embroiled in a debt crisis. But many think ‘it’s just another recession. They’ll come out of it after a few quarters.’
Unfortunately, the US is staring at the possibility of default today. This means that the US government would be out of money to pay their debt obligations. The US out of money? Unthinkable? Well, in the next few months we will know the outcome.
How did the US get itself into such a situation?
They had emerged from WWII as the largest creditor nation in the world but within a few decades have become the largest debtor nation. The US economy today can be likened to an individual who spends all that he earns and then borrows the rest. For such an individual in the real world, bankruptcy is not far off should such a lifestyle persists.
Personal bankruptcies are not unheard of in the past. Even corporations goes bust when they spend more than they earn. However, in the last few years, we are witnessing more bankruptcies at the state level and near bankruptcies (saved by bailouts) of countries. Portugal, Ireland, Italy, Greece and Spain (PIIGS) are countries that have come close to defaulting on their debt obligations.
The debt of the US surpasses the PIIGS countries. The country’s debt excluding unfunded liabilities is fast approaching the $17 trillion dollars mark. It reached $16 trillion dollars in September 2012. It had hit the $15 trillion dollars mark in Nov 2011. It is piling on at least a trillion in debt every year.
Economists have estimated that the true debt of the US could be more than $70 trillion dollars if unfunded liabilities such as Medicare and Medicaid were added. To appreciate the magnitude of this number, the combined GDP of all the countries in the world in nominal terms in 2012 was around $70 trillion dollars.
The US government has a mechanism to limit spending. It has a legislative restriction on the amount of debt its Treasury can issue. It is called the debt ceiling. Unfortunately, it is a ceiling that has been raised 74 times since 1962 – more recently 7 times under President Bush and 7 times under President Obama.
In 2011, when there was no common consensus reached to raise the debt limit, it resulted in the spike of gold price to new record highs of over $1900 US dollars. Within the same period, the Singapore dollar appreciated to a record high of $1.20 Singapore dollars to $1 US dollar. These events showed a flight from the world reserve currency to gold and other safer assets. It was a natural reaction if the issuer of the currency is showing signs of default.
In October 2013, the need for the US government to approve the increase of the debt limit will once again take center stage. In view that the debt limit has been raised so many times in the past, it is likely that the same thing will happen again. However, we should come to the realization of how terrible the US fiscal state is at the moment. If they avoid default now it is because they can print more US dollars to pay down maturing debt. Their debt continues to grow exponentially.
The need for people to diversify out of fiat currency valued assets has never been greater. Why wait for the next global scramble out of fiat currencies and into precious metals? Buy gold and silver to diversify and protect your wealth today.