Special Report: Fiscal Cliff? U.S. Debt Ceiling is the REAL Issue

Debt Ceiling to allow U.S. Debt to hit historic level in early 2013

While there have been and continue to be a significant number of hands wringing over the fiscal cliff , which takes effect on December 31, perhaps the REAL issue is coming very early in 2013: the U.S. Debt Ceiling.

The fiscal cliff is being discussed on every business report on television, radio, Internet blogs and print media. As you most likely know, fiscal cliff is the name given to the event associated with the simultaneous expiration of the Bush-era tax cuts, the increase in the payroll tax and the immediate reduction of federal government spending. For reference, here are links to APMEX’s special reports n the fiscal cliff.

Fiscal Cliff is but the Beginning

While the sudden and significant impact of multiple changes in the economy is surely creating anxiety and uncertainty in both the personal lives and business of Americans, this is likely only the beginning of issues as the United States begins to respond to the “new normal” following the Great Recession.

However, the next increase in the federal debt ceiling – the maximum amount the U.S. may borrow as set by Congress – will establish the maximum U.S. Federal Debt at about $18 trillion. While this is, of course, a huge level of debt and the largest debt of any country, the U.S. also has the world’s largest economy.

The question that each country must address is “How much debt can this country afford?” The answer depends on a number of factors and is often measured in the ratio of debt to Gross Domestic Product (GDP) of the borrowing country. Historically, for the U.S., this ratio has generally been between 30 percent and 65 percent, from 1950 until the beginning of the Great Recession in 2008.

U.S. Debt is at Historically High and Dangerous Levels

When the next debt ceiling is set by Congress, most likely in early 2013, presuming borrowing to the ceiling and low GDP growth, the U.S. Debt to U.S. GDP ratio will most likely be about 120 percent, a level more than double the historical levels since 1950.

How does this compare to other countries? Below is a table of several key countries around the world. Also, here is a complete list of countries with Debt to GDP levels provided by the International Monetary Fund.

countrydata

The History and the Current Status of the U.S. Debt Ceiling

During World War I in 1917, the U.S. Congress passed a law requiring Congressional approval on the aggregate debt outstanding of the United States. Prior to this, Congress was required to approve each and every debt offering. Since 1950, there have been 95 changes to the debt ceiling; since 2000 there have been 13 changes, or about one per year. You can read about the History of the U.S. Debt Ceiling or see a listing of all changes to the U.S. Debt Ceiling, use Table 7.3.histroyofdebt

Since 2000, the increases in the U.S. Debt Ceiling have been larger than in previous years as the United States borrowed more to finance the 2000 dot-com bust, the wars in Afghanistan and Iraq, and the Federal support of the Great Recession of 2007–2008.

The current status of the U.S. Public Debt and the Debt Limit is shown in the charts below. The U.S. Debt has increased by more than 15 percent since January 2011. The current U.S. Debt is very close to the U.S. Debt Ceiling of about $16.5 trillion and, accordingly, Congress will be required to take action very soon.USpublicdebt

The U.S. Debt has increased $2.1 trillion, or about 15percent, in just two years since January 2011. Despite the large increase, the Federal Government has almost borrowed to the limit.

The U.S. Debt Ceiling must be raised in the very near future, most likely in a few months. As the chart below shows, at the end of October 2012, only about $172 billion remained available under the U.S. Debt Ceiling. In November 2011, federal borrowing increased by $119 billion, and if that were the borrowing rate for November 2012, almost all of the available U.S. Debt availability would be consumed.

Note: In an article in The Wall Street Journalon December 12, 2003, it was reported that the U.S. Treasury currently has only about $67 billion remaining in borrowing capacity.

usborrowingThe red line represents the total borrowing capacity of the United States that is above the current aggregate outstanding U.S. Debt. Since January 2012, U.S. borrowing has increased such that the remaining availability has declined each month , leaving the availability in November 2012 at just $172 billion. Here is the U.S. Treasury Monthly Statement of the Public Debt of the United States.

Gold and the U.S. Debt in 2012 and Beyond

With much debate on the fiscal cliff and future debate on the debt ceiling, the end result will be that the U.S. will most likely continue to be in a period of very high federal debt relative to the GDP. This relationship cannot be changed in a year and perhaps not even in five years.

The Europeans are ahead of the United States in addressing their debt to GDP issues with Greece, Portugal, Ireland and Italy. Spain will most likely become a problem as well. The solution in Europe has been the same as the solution in the U.S.: the Central Banks create more currency to keep the economy from falling even further.

A recent article in Barron’s, titled “Is Bad News Still Good News for Gold?” Randall Forsyth, the author, in the last paragraph says

As long as authorities try to do whatever it takes to hold the system of fiat currencies and indebted governments from flying apart, paper money will continue to lose value relative to the traditional store of value, gold.

Also read

Special Report: Fiscal Cliff is Only 1 of “4 Horsemen of the Economic Apocalypse” for 2013

Special Report: 5 Possible Outcomes of the U.S. “Fiscal Cliff”

Special Report: Read about the United States Fiscal Cliff

 

 

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Gold’s long term endurance touted; America records budget surplus

The Gold price has dropped to a low not seen since 2008. When this happened in the past, it made investing in the Precious Metal a great opportunity. The short-term outlook does not seem to show much change, as long as the situation in Europe continues and the United States’ economy keeps moving upward. However, “On a long-term basis, Gold has a place in most investment portfolios for two reasons: We foresee demand returning from emerging markets, and more and more investors buy Gold as a hedge against inflation,” said Sanjeev Sardana, financial adviser and chief executive officer of Bluepointe Capital Management.

The 13-year stretch of growth in China seems to be losing momentum. Reports of China’s industrial production and retail sales missing forecasted numbers are major factors. The People’s Bank of China is adding about 400 billion yuan into the banking system by cutting reserve requirements. The current interest rates have also raised concerns. “Chances of an interest-rate reduction are still small at the moment,” said Lu Ting, a Hong Kong-based economist.

Something happened in the United States for the first time since 2008. In April, the Treasury Department recorded a $59 billion surplus. Even with this good sign, it is not expected to last. The Treasury is facing a $1.33 trillion deficit for 2012. It is less than last year’s number, but far from positive enough to give investors the confidence they need.

At 1 p.m. (EDT), the APMEX Precious Metals spot prices were:

  • Gold – $1562.40 – Down $23.10.
  • Silver – $28.38 – Down $0.59.
  • Platinum – $1444.40- Down $28.00.
  • Palladium – $595.10 – Down $9.30.
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