NEWS | August 9, 2023
In just two weeks, the USA could face insolvency. Republicans are accepting this risk, as long as they can advance their election campaign by holding onto the old debt ceiling as long as possible. Last Friday, JP Morgan established a designated “War Room” where employees gather regularly for crisis meetings to simulate the worst-case scenario: a state default on June 1st.
If the USA doesn’t raise the debt ceiling, they won’t be able to borrow money to pay their bills. This would be disastrous, as it would lead to a lack of funds for social programs, pension payments, and government employee salaries. Furthermore, US Treasury bonds form the foundation of the global financial system, with a total value of 24 trillion dollars. The vulnerability of the international financial system in this regard is evident in the crisis of Silicon Valley Bank, triggered by rising interest rates on such bonds. The crisis quickly spread, with many fearing a domino effect.
US Treasury bonds are often used as collateral for loans. In the event of a US default, financial institutions could demand their business partners to immediately replace affected bonds. The resulting disruptions in the bond market could quickly spill over to other markets.
Currently, no one really believes that Republicans and Democrats won’t reach an agreement this time. Discussions about the debt ceiling are nothing new, and a solution has been found each time so far. Nevertheless, insurance premiums against the default of US Treasury bonds are rising. Banks, brokers, and trading platforms are all preparing for various scenarios and bracing for the worst. The credit rating agency Fitch has also taken notice of the dispute and is considering a downgrade of the USA. If the country were to lose its current AAA rating due to impending insolvency, it would undoubtedly lead to further market disruptions and associated sell-offs.
The longer the conflict persists, the more damage the international reputation of the dollar as the world’s reserve currency will suffer. Many countries are already planning to replace the dollar as the primary currency for oil transactions with another currency. If, against this backdrop, doubts are cast on the solvency of the issuing country, it’s only a matter of time before the dollar is replaced.
In such a situation, true security can only be found in commodities. Technology metals and rare earths constitute a pure commodity trade that exists outside of the financial market and its disruptions, while also offering the prospect of attractive tax-free returns.