There’s no shortage of panic-button statements from financial commentators. However, when the alarm bells are being rung by the chief executive of one of America’s biggest banks, investors are bound to sit up and pay attention.
As you’re surely already aware, the U.S. government faces a looming default as soon June 1 if Congress and President Biden don’t come to an agreement to raise the nation’s debt limit or “debt ceiling.” Treasury Secretary Janet Yellen has already warned of the dire consequences to the economy if such an agreement isn’t reached soon.
It’s not every day that you’ll hear the U.S. secretary of the Treasury caution of looming “economic chaos.” Yet, that’s precisely the phrase Yellen used, saying, “Whether it’s defaulting on interest payments that are due on the debt or payments due for Social Security recipients or to Medicare providers, we would simply not have enough cash to meet all of our obligations… And it’s widely agreed that financial and economic chaos would ensue.”
When the government’s current borrowing limit of $31.381 trillion isn’t enough, it’s a sign that we’ve become a perennially indebted nation. Furthermore, Connecticut Representative Jim Himes suggested that a U.S. debt default would be unprecedented: “The United States has never really come close defaulting on its debt before. So it’s hard for us to imagine what that might look like.”
Evidently, it’s not hard for JPMorgan Chase CEO Jamie Dimon to imagine what a U.S. default would look like. He envisions that it would be “potentially catastrophic” for the country, and that the “closer you get to it, you will have panic.”
Courtesy: Bloomberg, @LizAnnSonders
Of course, Dimon knows a thing or two about economics as an insider in the American banking system. JPMorgan Chase rescued failing regional bank First Republic, but Dimon can’t possibly save the entire country from economic peril if there’s a debt default.
Moreover, there wouldn’t be anyplace on the planet to hide as the fallout of a U.S. debt default would be global in scope. As Dimon put it, “If it gets to that panic point, people have to react, we’ve seen that before… It’s a really bad idea, because panic becomes something that is not good. It could affect other markets around the world.”
At the very least, it would increase the financial burden of anyone in the U.S. with any kind of debt – which is to say, practically every adult in the country. Rohit Chopra, director of the Consumer Financial Protection Bureau, explained that a failure to raise the debt ceiling could lead to people having to pay higher rates on their credit card, automobile, and home loans.
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Those consequences would be in addition to the presumed job losses and other financial problems. Sharp increases in consumer loans could equate to “hundreds of dollars a month in extra payments for households,” Chopra stated, adding that this “will have a real effect on people, especially those who live paycheck to paycheck.”
Unfortunately, there are already signs that debt limit negotiations may already be breaking down. Biden was scheduled to meet with congressional leaders on Friday, but reportedly that meeting has been postponed until next week.
Don’t be surprised if politicians on Capitol Hill use this dire situation as an opportunity to sneak through spending allocations that will benefit their home states at the expense of federal taxpayers. After all, as the old saying goes, never let a crisis go to waste.
U.S. Interest Rate. Courtesy: @GameofTrades_
Beyond the political implications, the government’s failure to agree on a debt ceiling solution would, according to Dimon, impact the four C’s of the financial realm – “contracts, collateral, clearinghouses, and… clients definitely around the world.” With that dire prognostication, Dimon urged the nation’s elected leaders, “Please negotiate a deal.”
It remains to be seen whether Dimon’s plea falls on deaf ears, but I wouldn’t recommend getting your hopes up. The division between the two sides of the political aisle is deep in the 2020s, and neither side wants to be viewed as conceding to the other now.
Once again, the argument in favor of holding precious metals is as strong as it’s ever been. Unlike a debt limit deal, gold and silver ownership don’t require any agreement or support from politicians in Washington, D.C. So, be sure to structure your wealth so that it can withstand, and even benefit from, the government’s failure to get along, discipline itself, or arrive at anything resembling a viable solution to its problems.
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