How To Avoid Raising The U.S. Debt Ceiling

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 28, 2023

IN THIS ISSUE:

1. US Hits Debt Ceiling, Turns To “Extraordinary Measures”

2. The Government’s Gold Holdings Are Vastly Undervalued

3. The Legislative Authority Is There – But Should We Use It?

4. Yellen: No Recession With Unemployment At 53-Year Low

Overview – US Hits Debt Ceiling, Turns To “Extraordinary Measures”

The US hit its statutory debt limit of $31.4 trillion in January, at which point the Treasury began employing so-called “extraordinary measures” to pay its bills. But most experts, including Treasury Secretary Janet Yellen, agree these extraordinary measures will run out sometime in June.

When that happens, Congress will have to approve an increase in the debt limit or the government will default on some of its debt – something which has never happened before – and would be a disaster. But, as usual, Republicans and Democrats are divided on how to fix this problem, so another unsettling debt ceiling battle is virtually assured in a few months.

But what if there was a way the government could pay its bills beyond June without increasing the debt ceiling? I recently found one. Let me emphasize that I am not in favor of the government using this option, but it is being talked about, so I think we need to understand the issues. I’ll discuss those issues as we go along today.

The Government’s Gold Holdings Are Vastly Undervalued

It would be ridiculous, wouldn’t it, for the Treasury to default on its debt when it owns more than half a trillion dollars-worth of the most classic monetary asset there is: gold. If there was a way to convert the gold into cash in the Treasury’s bank account – at today’s gold price level – then the government could pay its bills through the end of fiscal year 2023 without an increase in the debt limit.

There is a way, and it has been done times in the past. All that is required is the passage of a bill that changes a few words in existing legislation — a bill that both Republicans and Democrats might support.

As you probably know, the US government owns a LOT of gold. The Treasury owns 261.5 million ounces of it, or more than 8,170 tons. Currently, the market price of gold is just above $1,800 per ounce, so the Treasury’s gold is actually worth nearly $500 billion. But because of a law passed in 1973, the Gold Reserve Act requires the Treasury to value its gold at only $42.22 per ounce – which means the government’s gold is officially valued at only just over $11 billion.

Gold is in fact a giant undervalued monetary asset of the Treasury. So, why couldn’t we simply amend the Gold Reserve Act to allow the Treasury to value its gold at current market prices, instead of a ridiculous $42 ounce? We certainly can. The question is, should we?

With the proposed change, the Treasury could simply issue gold certificates against the current market value of its gold and deposit these certificates into its account with the Federal Reserve. The Fed will credit the Treasury’s account with an equivalent value in dollars – in this case nearly a half a trillion dollars.

As noted above, the Treasury has $11 billion in gold certificates deposited with the Fed now. If the Treasury revalues its gold holding to current prices, it is estimated the Treasury would have nearly $500 billion more gold certificates it could deposit with the Fed – without creating a penny of additional Treasury debt.

The Legislative Authority Is There – But Should We Use It?

The Gold Reserve Act, as amended in 1973, provides that: “The Secretary [of the Treasury] may issue gold certificates against other gold held in the Treasury. The Secretary may prescribe the form and denominations of the certificates.” So, the authorization to create gold certificates could not be clearer.

Then comes the words needing legislative change: “The amount of outstanding certificates may be not more than the value (for the purpose of issuing those certificates, of 42 and two-ninths dollars a fine troy ounce) of the gold held against the gold certificates.”

I don’t know how Congress arrived at a price of $42.22 in 1973 because the market price of gold fluctuated from around $65 to $125 dollars that year. I was still in college in 1973 and didn’t pay much attention to such things. In any event, the official price for gold held by the government was set at $42.22 and has been there ever since.

New legislation would be required to modify the Gold Reserve Act to strike “42 and two-ninths dollars” and replace it with “the current market value (as determined by the [Treasury] Secretary at the time of issuance).”

If enacted, the Treasury would have nearly $500 billion more in assets with no additional debt. The president’s latest federal budget proposed a deficit of $1.2 trillion for fiscal 2023, so the additional funds should carry the Treasury from the current June deadline to easily past the end of fiscal 2023 at the end of September.

This would give the new Republican House majority, and the Democratic Senate majority, time to negotiate, in regular order, and pass a 2024 fiscal year budget with spending cuts as well as pass a new appropriately sized debt ceiling to facilitate government funding in fiscal 2024 and beyond.

By merely recognizing the true market value of the Treasury’s gold holdings, the intense embarrassment to the administration and Congress of a looming default by the Treasury can be avoided. It is indeed ironic that in a world of inflated fiat currency and massive deficit finance, simply recognizing the true value of the government’s gold holdings can keep the government solvent. There are no budgetary tricks involved. It’s been done before and could be done again.

The question, once again, is: Should we do it? There are reasons for and against.

What if the government adjusts the value of its gold holdings and lawmakers just decide to spend the extra half a trillion? It would be tempting for the politicos in Washington to consider this “free money,” so why not spend it?

On the one hand, giving the government an extra half a trillion does not make sense because they might just spend it. On the other hand, it doesn’t make sense to have the government’s gold priced at an archaic level set nearly 50 years ago.

We’ll see what happens.

Yellen: No Recession With Unemployment At 53-Year Low

I rarely agree with Treasury Secretary Janet Yellen, but we recently found some common ground. Earlier this month, she said she saw a path for avoiding a US recession, with inflation coming down significantly and the economy remaining strong, given the strength of the US labor market.

Yellen told ABC's Good Morning America program: "You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years. What I see is a path in which inflation is declining significantly and the economy is remaining strong."

US Labor Department data released earlier this month showed job growth accelerated sharply in January, with nonfarm payrolls up by 517,000 jobs and the unemployment rate dropping to a 53-1/2-year low of 3.4%.

The strength in hiring, which occurred despite layoffs in the technology sector, reduced market expectations that the US Federal Reserve was close to pausing its monetary policy tightening cycle. As regular readers know, I’ve said all along the Fed was not likely to end its rate hiking cycle anytime soon.

Yellen told ABC that reducing inflation remained Biden's top priority, but the US economy was proving "strong and resilient."

She added: Three separate pieces of legislation - the Inflation Reduction Act, the CHIPS Act and a massive infrastructure law - would all help drive inflation down, along with a price cap imposed on the cost of Russia oil.

Yellen called on Congress to raise the US debt limit, warning that failure to do so would produce "an economic and financial catastrophe."

Personal Consumption Spending Index Increased In January

The Personal Consumption Expenditures Price Index (PCE) shot up 0.6% last month, the largest increase since June 2022, after gaining 0.2% in December. In the 12 months through January, the PCE price index accelerated 5.4% after rising 5.3% in December.

Chart showing personal consumption expenditures rising

The PCE is the Fed’s favorite inflation index, as opposed to the Consumer Price Index and others, and while the PCE has come down some in recent months, it is still significantly above the Fed’s target inflation level of 2%.

Meanwhile, US consumer spending increased by the most in nearly two years in January amid a surge in wage gains, while inflation accelerated, adding to financial market fears that the Federal Reserve could continue raising interest rates into summer.

The report from the Commerce Department on Friday was the latest indication that the economy was nowhere near a much-dreaded recession. It joined data earlier this month showing robust job growth in January and the lowest unemployment rate in more than 53 years.

Consumer spending, which accounts for more than two-thirds of US economic activity, shot up 1.8% last month. That was the largest increase since March 2021. Data for December was revised higher to show spending dipping 0.1% instead of falling 0.2% as previously reported.

As long as personal spending continues to rise as it has since late 2020, a recession is not the most likely scenario. As always, if something arises which spooks consumers, spending could back off. But currently there is nothing on the horizon, and it is impossible to predict when the next recession will arrive.

Hoping you’re having a great year,

Gary D. Halbert

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