A House Divided Against Itself Cannot Stand: Debt Ceilings, Fiscal Cliffs and the Undoing of America
President Lincoln once said this now famous statement.
A house divided...
President Lincoln once said that "a house divided against itself cannot stand".
Wise words for current politicians to heed, but which they simply are choosing to ignore. Those who chose to ignore the lessons of the past are doomed to repeat the mistakes of the past.
Since Oct. 1, 2013, the government shutdown is costing Americans $ 6.6 million per hour and affecting millions of employers, employees, financial institutions and corporations directly through furloughs and reduced government services. This opportunity cost and lost opportunities will never be recovered by the American economy. Every hour federal taxpayers in the United States pay $6,666,666 towards the cost of the Government Shutdown.
The federal government has never experienced these kinds of fiscal problems in its history. If and when it comes up against the fiscal cliff it is unknown how it will react. However, whatever it does will not be pretty, and markets will react adversely in response to their decisions. when markets react adversely, corporations react themselves which results in implication in the job market and related financial markets.
Currently, federal receipts from taxation are less than 74% of federal government spending on all programs in total. If the government hits the fiscal cliff at full speed something must give as there are not enough receipts and resources to pay all the demands on those revenues. Reductions in spending on everything from national defence to social security checks to payments on the national debt will have to be made. This represents a reduction in the order of 26% and is unprecedented in American economic history, or 6% of Gross Domestic Product (GDP), far larger in magnitude than the fiscal cliff avoided in 2012. With another round of fiscal cliff and debt reduction talks underway in the House and in Congress and with no agreement in sight President Obama is powerless to lead a nation that is a "house divided against itself. Lincoln's warning about not being able to stand may soon come to fruition. No nation can withstand cuts of this magnitude that are necessary to deal with significant and increasing fiscal pressures and the US is no exception.
The impact of any significant reductions in spending will cut and cut hard and may include potential scenarios where the US delays payments to soldiers and service men and women, social security checks to seniors and the disabled, it ceases to issue income tax rebates and it defaults on the national debt. Following the development of a scenario such as this we would expect further repercussions such as a decrease in America's credit rating by all bond reporting agencies that would have a devastating effect on markets and the economy in general. In addition, borrowing costs of America would surely increase, thereby hampering its ability to repay its current and future debts. There would be a general hesitation and reluctance on the part of politicians of all stripes to incur any more debt, for any purpose. A recession the likes of which we have never seen would surely follow.
Then imagine that more cuts were needed to deal with increasing fiscal costs of this scenario and impending recession and what would then be required to deal with that situation. Today, more than 70% of federal tax receipts are absorbed by interest on the national debt, social security payments, costs of national defence and related expenses. Less than one out of every dollar in tax receipts is "free" to be allocated by the federal government for much-needed programs like investment in infrastructure, medical care, and education. This "squeeze out" of the dollar from productive uses and into servicing the federal debt and related non-discretionary spending has hindered the government from undertaking projects to build schools, roads, bridges, and medical institutions. The effects of these decisions will hamper America's efforts at urban renewal and other necessary and now unobtainable projects.
Today's historically low interest rate will soon be gone as the largest debtor in the world must deal with its debt repayment obligations and finds that creditors are no longer willing to lend them the necessary money to finance government operations. In order to obtain the funds necessary to finance government operations the US will have to pay higher and higher rates of interest. If you think the economic meltdown of 2008 was a problem, it ill pale in comparison to what is in store for us this time around.
The once vaunted status of the US as the pre-eminent financial power in the world has long gone, and we must now face the reality that we are trending toward a "have not" nation, as opposed to a "have" nation.
It appears that the American government is managing its affairs in a haphazard manner that results in moving from one financial crisis to another. Reactionary as opposed to pro-actionary. With the passing of every successive financial crisis we come perilously closer to the point of no return where the economy will go over the fiscal cliff and into an abyss from which we can never return.
America is a house divided and as Lincoln warned us, a house divided cannot stand. The House and the Senate cannot agree on what needs to be done to resolve this economic impasse. It is only a matter of time when the bill collectors come calling. The financial cupboard is bare. We cannot continue to borrow from Peter to pay Paul, as both are now conspiring together to get their bills collected.
What can you do to protect your wealth in the face of this gloomy environment?
Do what the professional investors are doing. Do what the large financial institutions are doing. Do what the most powerful economies in the world are doing. Buy gold and silver. Invest in gold and silver. Accumulate precious metals. Don't wait to buy gold, buy gold and wait!