U.S. Debt Downgrade Leads To Currency Debasement.

The Scoop On The U.S. Debt Downgrade Currency Debasement

The increase in bond yields due to fears over debt downgrade has resulted in selling pressure in the commodities markets. Authorities along with other alphabet networks should sound the alarm over the U.S. debt downgrade that leads to currency debasement.

Fitch, a credit ratings organization, recently issued an unexpected downgrading of the AAA credit rating previously held by the U.S. government.

The recent escalation of political tactics related to the debt ceiling played a significant role in motivating this decision. However, the downgrading was also influenced by broader apprehensions regarding the magnitude and long-term viability of the national debt.

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As much money as the government spends, there is no limit or consequence to the economy or debasement of our currency.

In response, the Biden administration presented Treasury Secretary Janet Yellen to express opposition to the downgrading and assert that the state of federal finances is favorable.

However, Douglas Holtz-Eakin, the former director of the non-partisan Congressional Budget Office, expresses skepticism toward Yellen’s assertions.

During an interview with Yahoo! Finance, the individual highlighted that there is currently no strategic initiative in progress inside the political sphere of Washington to address the deteriorating economic trajectory of the nation.

Yahoo Finance Anchor: Fitch downgrading its AAA credit rating on the U.S., the agency blaming rising political divisions and mounting debt. Treasury Secretary Janet Yellen denounced the move, calling it in her words, “Entirely unwarranted.” Our next guest says Fitch made the right move. Joining us now is American Action Form President and former CBO Director, Douglas Holtz-Eakin.

Douglas Holtz-Eakin: Fitch said three things, most of the conversation’s been about the erosion of governance, but they also pointed out importantly that the U.S. has a seriously unsustainable fiscal outlook, high deficits, and debts that will get higher relative to GDP as far as the eye can see, and importantly, it has no plan to deal with its fiscal outlook and so on the substance, the U.S. has a very big problem, and this isn’t news. This has been true for a while, and the fact that we continue to not deal with it, I think is the heart of the downgrade.

Investors are currently exhibiting an increasing inclination towards seeking elevated returns on long-term Treasury securities. The potential returns may still have a significant distance to cover to sufficiently remunerate investors for assuming both credit risk and inflation risk.

One potential concern for the metals markets is the possibility that elevated interest rates on debt instruments could pose a competitive challenge to stable monetary products and hopefully iron out the U.S. debt downgrade that leads to currency debasement.

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U.S. Debt Predicament

The present national debt is rapidly reaching a staggering sum of $33 trillion, while the projected U.S. Gross Domestic Product (GDP) for the current year is estimated to be approximately $26 trillion. When a nation’s debt surpasses its economic output, it is indicative of unfavorable fiscal conditions.

Furthermore, it is anticipated that the debt burden will have a more rapid growth rate compared to the economy over an extended period of time.

According to the Congressional Budget Office (CBO), it is projected that the United States government will experience an annual budget deficit of $1.4 trillion in the year 2023. The projected deficit is expected to have an average of $2 trillion annually throughout the upcoming decade.

In previous years, proponents of substantial government borrowing were able to highlight the relatively manageable nature of debt servicing expenses within a context of exceptionally low-interest rates.

However, the period characterized by the implementation of a zero-interest rate policy at the Federal Reserve has come to a conclusion. The proportion of the federal budget allocated to interest payments on the debt is projected to experience a significant increase.

The compounding interest on the debt, defense expenditures, entitlement programs, and other categorically designated “necessary” expenditures will exert significant pressure on discretionary spending.

Efforts made by those advocating for fiscal responsibility to reduce the budget deficit will encounter these aforementioned realities, together with deep-rooted political opposition against implementing any reductions in government expenditures.

Rather than prioritizing fiscal consolidation, the government will persist in largely depending on the Federal Reserve as its lender of last resort. Theoretically, the Federal Reserve has the ability to supply Congress with an endless amount of liquidity by utilizing the authority granted to it through the printing press.

In the forthcoming years, a substantial quantity of new fiat currency will need to be generated ex nihilo in order to fulfill the Treasury Department’s requirement for borrowed funds. The aforementioned will inevitably have inflationary ramifications.

Despite the presence of elevated nominal rates, the potential for government bonds or cash instruments to effectively outpace inflation and provide favorable returns for depositors is bleak.

If real interest rates remain positive, the effectiveness of inflationary fiscal and monetary policy in sustaining federal finances will be limited in duration.

The authorities in Washington require negative real interest rates, meaning that the value of the currency in which their loans are denominated should decrease at a faster pace than the interest rate they are obligated to pay.

Elevated nominal interest rates might create the perception that dollar-denominated debt instruments possess a particularly appealing quality in comparison to real gold and silver, as the latter does not generate any yield.

Moreover, it is worth noting that the markets for precious metals possess the capacity to generate substantial actual gains during a period of significant upward market trends.

Similar to the absence of a finite threshold for the depreciation of U.S. fiat currency, the potential ascent of gold and silver prices in relation to Federal Reserve notes is unrestricted.

In Summary

Certainly, it is imperative for investors to possess pragmatic expectations. There is no assurance that the gold and silver markets will exhibit superior performance compared to bonds within a specific year.

However, in a context characterized by a decline in creditworthiness and an increasing potential for inflation, investors should not perceive holding Treasuries as a secure option, irrespective of their stated return.

The absence of credit risk is a characteristic of hard money, which is typically represented by gold and silver. Furthermore, these assets possess an unparalleled ability to maintain their purchasing value over extended periods, surpassing that of any debt instrument issued by a government. What will happen next? Stay tuned…