I must admit I'm quite surprised by the tenacity of both sides in the debt ceiling stalemate. I still believe this is largely political posturing, and that we will see some type of agreement to raise the debt ceiling before August kicks off. The bond market continues to show signs of strength, which also suggests that someone somewhere has a willingness to buy US Treasury bonds, even on the brink of a US default. As such, I remain skeptical that we'll see the Treasury run out of money on
and not have anywhere else to go.
But as the hour is getting late, it may be worth considering what the reaction to a failure to raise the debt ceiling would be.
- As debt is money under the Federal Reserve System -- meaning that all money is loaned into existence, and thus the supply of money is nearly equal to the supply of debt -- failure to increase the debt ceiling means the potential for a decline in money supply. I believe we may see a short drop in money supply, as measured by MZM, which would come with a plunge in asset prices and something resembling a deflationary spiral.
- However, at some point the US Treasury bond market will run into trouble. With no additional money coming in from additional debt issuances, the US Treasury will not be able to make interest payments on outstanding debt. I suspect this will result in a panic exodus out of the Treasury bond market.
- Because of the intrinsic relationship between debt and money in our current monetary paradigm, I believe this will send a flood of dollars into the market. Rapid dollar devaluation could then emerge. Indeed, I believe US dollar instability and the transition to a new world reserve currency and new global monetary system is "the big picture" that drives the global economy.
This is not to say that a debt ceiling hike is a good thing. No, a hike simply perpetuates the problem of there being too much junk debt in the global economy -- debt that cannot, and thus will not, be repaid; it is simply being juggled around via the increasingly volatile global financial markets. Any real resolution involves an international monetary agreement, an agreement to re-value existing currencies, and the recognition of new currencies -- the latter of which is where gold comes into the picture.