Debt default would be equal to the 2008 Lehman Bros. collapse, says OECD
With less than one month left in 2013, gold
is down more than 20% on the year. But 2014 will be full of numerous economic and geopolitical hurdles that make the yellow metal a crucial part of every portfolio. One of them is the U.S. debt ceiling.
A U.S. debt default could prove as catastrophic as the failure of Lehman Bros.
in 2008, the Organization for Economic Cooperation and Development
(OECD) said in a report in late November.
Lawmakers in the U.S. side-stepped a debt default at the 11th hour in October and brought an end to prolonged negotiations over raising the debt ceiling. But talks are set to resume in the new year with the debt ceiling extended until Feb. 7 and funding approved until Jan. 15.
"An outright default would have extremely severe effects," the OECD said
. "It would be likely to create large confusion and uncertainty in financial markets given the importance of U.S. government bond rates in pricing financial instruments worldwide and the widespread use of U.S. government bonds as collateral in many financial operations, and trigger a systemic flight to liquidity that could prove as catastrophic and costly as that in the day following the Lehman failure in 2008."
Some critics of the debt ceiling are calling on U.S. lawmaker to follow the lead of Australia, which just announced a deal
to completely abolish its debt ceiling.
Given that the price of gold has largely risen with the U.S. debt ceiling, particularly during the bull market of the past 12 years, no debt limit would provide steady support for gold going forward.
Conversely, another debt standoff would cloud the markets and overall economy, potentially sending investment capital back into gold in the search for a safe-haven asset.
The Congressional Budget Office said last month
that the U.S. government would likely be able to continue borrowing money until sometime between March and June of 2014 before it bumps up against the statutory debt limit. "Given the volume of the government's daily cash flows and the uncertainty about the magnitude of key transactions during those months, the Treasury
could exhaust its extraordinary measures and authority to borrow as early as March or as late as May or June," CBO said.
"Some of the uptick in job creation and rosy outlooks for 2014 are based on the idea that the threat of crisis out of D.C. is largely over and that politicians may also figure out a way to avoid another big round of blunt spending cuts to start the year," noted Ben White
in a CNBC
contribution. "But it's too soon to count on either thing happening."
Though another government shutdown seems unlikely and would have less effect on the economy, the odds of a fresh debt-ceiling standoff are higher.
"The House GOP
caucus, sensing a powerful midterm election-year issue, may demand Obamacare
changes in return for a debt limit hike. And that's one issue where Democrats and the White House are unwilling to give even the slightest ground for fear it would set a dangerous precedent.
"The result is that D.C. is likely to remain a weight on the economy in 2014 -- certainly not producing anything helpful on tax and immigration reform -- and possibly a real debilitating factor."