By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
Rest assured.
After months of debates and sprawling headlines, our policymakers finally voted to raise the debt ceiling.
On May 27, President Biden and Speaker Kevin McCarthy reached an agreement over the debt limit.
Last Wednesday evening, the bill passed the House floor. On Thursday evening, it passed the Senate. And just this Saturday, President Biden signed the bill into effect.
Even though we’ve always said the legislation will be approved by both parties… the political posturing show brought us within days of a catastrophic default.
But it’s not just that.
The political drama has weighed on the U.S. dollar.
And raising the debt cap will only increase our total debt. That’s not good for the dollar, either.
Add in the fact that trust in the dollar is eroding on a global stage, and the grand finale of the debt ceiling wars suddenly isn’t all good news.
So today, I’ll explain why rising debt takes away from the dollar. I’ll also reveal two ways you can protect yourself against this rising trend…
The Debt Battle Wasn’t a Good Look for America
First, let’s examine the new bipartisan debt bill that was just signed into law.
Overall, it suspends the debt ceiling until 2025 and slashes government spending by a modest amount.
Here’s what it constitutes:
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The bill offers a two-year extension for the debt limit, meaning the debt cap will be suspended until January 2025. That takes us through the election period, leaving the next president and next Congress to deal with what happens in 2025.
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The bill eliminates $1.4 billion in IRS funding and redirects about $20 billion of the $80 billion that had been allocated to improve the IRS back to the budget.
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The bill restarts federal student loan payments after a long pause that began at the start of the pandemic.
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The bill introduces new work requirements for Supplemental Nutrition Assistance Program and Temporary Assistance for Needy Families benefits for people up to 55 years old. The current age requirement is for people up to 50 years old. However, it also introduces new exemptions for veterans and for the homeless.
The deal is being hailed as a compromise between Republicans and Democrats.
Regardless of what you may think about the bill, it will have implications for our country’s debt.
I’ll go into what it means for our debt in a moment. But let’s first explore the global ramifications of the events that took place…
After the debt battles on Capitol Hill, the U.S. looks weaker to both foreign nations and its own electorate.
When President Biden was asked about a resolution to the debt ceiling at the recent G7 meeting in Japan, he didn’t have a good answer. He said he’d done his part to offer a solution to avoid a default.
This didn’t just make the White House look weak, but the entire U.S. government’s political status seem unstable to the world.
Nobody wins when your ship takes on more water with a broken sail.
Now, as I explained last Thursday, foreign nations are selling their holdings of U.S. treasuries.
That means nations around the world are slowly moving away from the dollar.
Combine the shunning of U.S. treasuries with U.S. battles over its debt, and you get a lack of confidence in the U.S. government’s ability to make decisions – both about its debt levels and policy in general.
More Debt, More Volatility
Now that the debt ceiling will be raised, the U.S. will have the money needed to avoid a default on its debt.
But issuing more debt only makes our economy more fragile.
It means that in order to function, the U.S. must borrow more. That’s not a path toward economic stability. It’s quicksand economics. You can’t solve debt problems by getting deeper in debt.
The more U.S. debt there is, the lower the value it has. That’s because in a world where the main buyers of that debt are cutting their holdings, adding more to the pile makes it even less appealing.
You can only solve the issue of debt with solid economic growth. And the Fed is messing that up.
You see, the Fed’s rate hikes were sold as a policy designed to temper inflation.
But the effects of interest rate hikes are slowing our economy. They’ve also made our economy weaker as more people borrow at higher interest rates and as more bank failures pile up.
For example, the pace of U.S. economic growth has slowed this year. It grew by just 1.1% during the first quarter of 2023 vs. 3.2% during the last quarter of 2022.
The growth in average pay for workers has also slowed. According to the May monthly National Employment Report by ADP, pay went from 14.2% growth to 13.2% growth. This was the slowest pace since November of 2021.
Ultimately, this means workers don’t make as much money… so they can’t afford to buy as much. And that means less economic activity.
What’s more, the amount of consumer credit card debt hit a new record of $4.82 trillion in February. This continues a trend of historically high rates that began in early 2022.
Credit card debt increased by 18% over just last year. And higher interest rates make it harder to pay off that debt than when we had lower interest rates. This also limits an American’s purchasing power.
So with a slowing economy and increased debt, the outlook for the dollar is only bound to get worse.
When Washington raises the debt ceiling, that means our debt as a nation will also increase. In fact, that’s the whole point of raising the debt cap – to be able to borrow more when necessary.
As a result, the U.S. debt will go up as a percentage of GDP. This means our economy is growing slower than our debt.
All of these factors weigh on the dollar. More debt and fewer buyers of that debt make its value appear less attractive.
Of course, there can be other events and geopolitical situations in the world that could cause either the dollar or the value of our debt to appreciate. For instance, if the Fed goes to Stage 2 of its pivot or enacts more quantitative easing (QE) to buy our debt, it could help bolster the value of U.S. debt. Stage 3 – or a decrease in interest rates – could help in the same way.
But this might not be enough to counteract other nations de-dollarizing.
This is why we continue to recommend real assets – assets that central banks can’t create out of thin air.
Gold fits the bill perfectly. It’s shown a historic ability to perform well in times of inflation and economic weakness.
The best way to buy gold is with a combination of physical gold and gold stocks.
You can buy physical gold online through accredited places like the U.S. Mint.
I wrote a piece detailing the best places and practices to buy physical gold. If you didn’t catch it, read up here.
You can also buy a gold exchange-traded fund (ETF) that is backed by physical gold. Gold ETFs offer the advantage of holding gold without the hassle of storing, securing, or transporting it. (I covered this in more detail in one of our mailbag issues.)
I’ve found another asset that’s immune to the fluctuations in our currency. It’ll help you become your own banker and protect your portfolio during times of increased debt and volatility. To learn more about it, make sure you watch this video presentation I put together.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. Buying physical gold and gold ETFs is a great place to start when you’re looking for a safe haven in your portfolio.
But as the future of the dollar remains on shaky footing, it becomes even more important to diversify your portfolio. That’s where individual stocks come into play. I’ve actually identified my No. 1 gold pick for 2023 and beyond… and three “unprintable” plays to prepare for more volatility in the markets.
If you want in on all the details, make sure you watch my video presentation right here.