US politicians take financial markets back to the edge again

The battle royal between the Republicans and Democrats over the extension of the US debt ceiling above $14.3 trillion, or a historic 100 per cent of GDP, reaches its conclusion this week.

Markets will fall as the debate heats up and brinksmanship takes over. But equally predictable is the rally when the politicians make a deal, rather like the eurozone crisis of the past few weeks and months.

High stakes

However, what is at stake is far more than the need to secure enough funds to stop the US federal government running out of money and a debt default on August 2nd.

A government debt of more than 100 per cent is a classic alarm signal. It is only right that this is debated in a public forum and the issues aired now.

For above 100 per cent a country’s bond market will begin to raise interest rates to slow debt accumulation down. It does so for good reason.

The debt is now so big that servicing the interest starts to become impossible without borrowing even more. So borrowing is needed to finance borrowing and the debt starts to balloon.

As the debt inflates so does the money supply and consumer price inflation and the unit of currency devalues. That is why gold and silver priced in US dollars are jumping in price and gold is at another all-time high.

Importantly for investors there is no easy solution for politicians to vote a solution. Raising the debt ceiling gets us past August 2nd but it achieves little else.

1970s deja vu

The inevitable denouement remains. To ArabianMoney it looks like becoming a more intense version of the stagflation and dollar weakness of the 1970s.

You therefore have to position your asset allocation to profit from this and not in such a way as to lose from it as most investment classes that performed well in the past will undoubtedly do.

For legal reasons we cannot give specific investment advice on this website. We keep that for our monthly investment newsletter, the only independently produced one from Arabia, and not surprisingly the subscription levels are rising as this crisis develops 

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