- If Uncle Sam busts through the debt ceiling?
- One the downside: The investment impact
- The “trillion-dollar” platinum coin gambit
- Tight food supplies (Parts 1 and 2)
- Readers on: Big 4 banks on the brink (“A stake driven through the heart”)… “The only way tyranny has ever been overcome”… And more!
At the dawn of a new week, we seek to look on the bright side if Uncle Sam busts through the debt ceiling…
On the downside, however, if the government defaults and the impasse between Congress and the White House drags on for weeks… we’re looking at a 2008-level crisis.
Or so says Mark Zandi, chief economist with Moody’s Analytics.
Like us, Zandi has been anticipating some sort of dire outcome since the start of the year, when the Treasury hit the $31.4 trillion ceiling and began resorting to accounting tricks to stay below the ceiling.
Those tricks work for only so long, and the Congressional Budget Office said Friday the clock will run out sometime in the first two weeks of June — after which the government won’t be able to pay all its bills.
Said Zandi: “Based on simulations of the Moody’s Analytics model of the U.S. and global economies, the economic downturn ensuing from a political impasse lasting even a few weeks would be comparable to that suffered during the global financial crisis.
“That means real GDP would decline almost 4% peak to trough, nearly 6 million jobs would be lost and the unemployment rate would surge to over 7%.”
And the investment impact? “Stock prices would be cut almost in one-third at the worst of the sell-off,” says Zandi, “wiping out $12 trillion in household wealth.”
We’re sure Zandi and his crew ran all sorts of numbers to come up with this conclusion. But the conclusion is only as good as the model it’s based on, and the assumptions going into that model.
Fact is, no one knows what would happen during a protracted standoff because it’s never happened before.
But this much we do know: “The Republicans and Democrats are playing a game of chicken,” says Jim Rickards. “Holders of U.S. government securities are being held hostage by the two parties.”
Yes, there are potential workarounds. “The Democrats have proposed legislation that would raise the debt ceiling as part of a larger and otherwise unimportant piece of legislation,” Jim explains. “This proposed legislation can be made subject to a ‘discharge petition’ designed to force the legislation to a floor vote even over the objections of the speaker of the House.
“The discharge petition will require all Democrats plus at least five Republicans to succeed.”
Yeah, good luck with that. “This discharge petition is a long shot but cannot be ruled out.”
Then there’s the 14th Amendment gambit: “The validity of the public debt of the United States, authorized by law… shall not be questioned,” says the relevant clause.
“Some legal scholars argue that the clause is absolute,” says Jim, “and should authorize the president to order the secretary of the Treasury to issue whatever debt is needed regardless of the debt ceiling to pay any obligations of the government.
“This clause has never been litigated in this context so the result is highly uncertain. The clause appears in a section of the 14th Amendment pertaining to debt needed to finance the Civil War and the rejection of any obligation to pay debts of the Confederacy. A court might read this narrowly and say that it does not apply to a situation in which the Treasury is not authorized to issue new debt.”
Another wrinkle is this passage in the Amendment: “The Congress shall have the power to enforce, by appropriate legislation, the provisions of this article.”
Per Jim, “A court could read that to say that only Congress can decide when to back up the public debt and the president cannot act unilaterally.
“In any case, the use of the 14th Amendment is likely to precipitate a constitutional crisis to be resolved by the Supreme Court. Markets would be in chaos pending an outcome and likely remain in chaos based on a loss of confidence in the ability of the U.S. to manage its fiscal affairs.”
And the trillion-dollar platinum coin? Forget it.
This was an idea the chattering classes were keen on during the 2011 debt-ceiling showdown.
The concept here, as Jim explains, is “to order the Mint to produce a single platinum coin for the Treasury, have the Treasury declare the coin to have a value of $1 trillion, deposit the coin with the Federal Reserve in the Treasury General Account (TGA) and then proceed to claim $1 trillion dollars of spending power backed up by Fed money printing.
“This trillion-dollar coin idea has never been tried, has never been tested in court and is ridiculous on its face. It would reduce America to a laughingstock. Even those with no knowledge of fiscal and monetary affairs would see through the scam. This idea seems only to appeal to those with a low-to-medium IQ such as financial journalists.”
Jim is too gentlemanly to call out New York Times columnist and Nobel economics prize winner Paul Krugman by name. But we are not. Heh…
Here’s the thing: Even if there’s a last-minute agreement, expect considerable market turmoil.
Here again, we return to the debt-ceiling drama of 2011 — which was resolved with only a day or two to spare. Like now, there was a Democratic president and a Republican House majority.
Default was averted, yes, but the fallout was huge…
- The stock market skidded 17% in 17 days
- The bond-rating arm of Standard & Poor’s downgraded U.S. government debt from a pristine AAA rating to AA+
- As investors and traders fled for safety, gold soared $250 to record highs over $1,900.
Important point: Back then, House Speaker John Boehner had a 49-seat majority. He could get away with alienating a couple dozen members of his caucus to reach a deal with President Obama. Today, Speaker Kevin McCarthy has a fractious majority of only nine.
The debt ceiling will surely be one of the topics Jim touches on this week when he sits down with former Federal insider Danielle DiMartino Booth for a candid talk about the risks facing the economy and markets for the rest of 2023.
This extraordinary meeting of the minds will take place at Jekyll Island, Georgia — the “scene of the crime” where top bankers and politicians connived in 1910 to create the Fed. And it’s less than 48 hours away — 1:00 p.m. EDT this Wednesday.
You can join in via live webcast. There won’t be a heavy-duty sales pitch for one of our premium trading advisories — just a steady stream of insights and actionable advice, our way of saying thanks for your patronage. And signup couldn’t be easier — click here, and you’re in.
The Nasdaq Composite begins the week within spitting distance of its year-to-date highs reached last week.
At last check, it’s up a third of a percent and just two points away from that high-water mark at 12,326. The S&P 500 is nearly flat at 4,125. The Dow is bringing up the rear, down a tenth of a percent at 33,268.
The big news in precious metals is the world’s biggest producer Newmont Corp. finally striking a deal to take over Australia’s Newcrest Mining for $17.5 billion. The agreement gives Newmont significant exposure to copper in addition to gold — no small matter in the “green energy transition.”
NEM shares are up 1% as we write — which is more than you can say for the metals themselves. Gold is up three bucks to $2,013 while silver is clawing and scratching its way back to $24 after last week’s beatdown. Crude has bounced off the $70 level, up $1.14 to $71.18.
The only economic number of the day is our first so-far-in-May reading, and it’s terrible: The Empire State Manufacturing Index clocks in way below expectations at minus 31.8. This measure of New York State factory activity has been crazy-volatile all year… but the overall trajectory since mid-2022 has been down.
Did we mention platinum earlier? A global platinum shortfall will likely set a record in 2023.
According to figures from the World Platinum Investment Council, demand will leap 28% year-over-year on the strength of China’s reopening. Meanwhile, supply is taking a hit as South Africa’s power grid nears collapse — putting a huge dent in mining output.
As you might know, platinum is essential to the catalytic converters in vehicles with internal-combustion engines. Auto production is only now starting to ramp up again after all the semiconductor shortages of the last couple years.
Result? “It would be a record deficit in ounces since records going back to the 1970s,” says the WPIC’s Edward Sterck to the Financial Times.
At $1,070 an ounce this morning, platinum prices have only recently begun trading above their historical averages again. If you want to play it, platinum ETFs abound… or if you like real metal, there are bars and coins too, including U.S. Platinum Eagles.
Tight food supplies, Part 1: What was a drought in California’s most fertile regions in recent years is now a flood.
Tulare Lake in the San Joaquin Valley is rising… and so are the crop losses, potentially billions of dollars’ worth. Production in parts of the Tulare Lake basin and the Central Valley are down 10% — we’re talking strawberries, leafy greens and tomatoes.
California produces about 90% of “processing tomatoes” used in the United States — the stuff that’s canned or gets turned into tomato juice, ketchup, etc.
“Tomatoes stand to be one of the crops where consumers will see the biggest impact,” Dusty Ference of the Kings County Farm Bureau tells the San Francisco Chronicle.
Tight food supplies, Part 2: It’s the middle of the country that’s drought-stricken now — so much so that wheat farmers are just giving up on this year’s crop.
The U.S. Department of Agriculture projects farmers will harvest only 67% of their planted wheat acres — which would be the lowest figure since 1917. Wheat futures jumped nearly 7% after the feds released those figures on Friday.
“Some wheat plants this season were so stunted by a lack of moisture that they won’t produce so-called heads of grain, leaving little reason to harvest them,” says a Bloomberg story. “Farmers can instead file crop-insurance claims for failed acres, or choose to plant something else.”
“One of the Big Four banks is in trouble???” a reader writes after Friday’s edition.
“My grandma always told me it was bad juju to wish ill on anyone or anything, but if any of the Big Four banks is going to collapse because of this mess, please, dear God in Heaven, let it be Wells Fargo.
“If there is another bank more deserving to have a stake driven through its heart, the body burned and the bones ground to ashes, with burial of the cremains 1,000 feet deep in an abandoned salt mine, I’d like to know its name.”
The 5: JPM — which admitted to five criminal felony counts between 2014–2020?
“Jekyll Island,” reads the subject line of our next entry — clearly in reaction to our Secrets of Jekyll Island event on Wednesday featuring Jim Rickards and Danielle DiMartino Booth.
“G. Edward Griffin shed the light on this travesty almost 30 years ago. You guys are playing catch-up. But kudos for doing so — maybe people will be more receptive to the info now.
“He said back then that it’d take 50–100 years to reverse the damage. I say that the only language these bloodsucking vermin understand is outright revolt… Vive la revolution!”
L’REVOLUTION!!…
“It’s the only way tyranny has ever been overcome.”
The 5: As it happens, Griffin’s book is one of the very cool giveaways we have scheduled during the event on Wednesday. (If you’ve never read it, it might be the first time you encounter the name Maurice Strong — the globalist uber-villain of his time before Klaus Schwab.)
We also have Jim Rickards’ short-and-sweet book The New Case for Gold and Danielle DiMartino Booth’s Fed Up.
But it’s not just the gift of knowledge we have lined up. During the event we’ll also be giving away five ounces of gold and 50 ounces of silver.
You can’t win if you don’t watch. And the way to make sure you watch is to sign up for access right here. We hope you can join us on Wednesday at 1:00 p.m. EDT.
Best regards,
Dave Gonigam
The 5 Min. Forecast
