How Much Attention Should You Pay to the US Debt Ceiling?

According to a weekend report from Bloomberg News:

A U.S. government shutdown means President Barack Obama will have fewer people to cook meals, do the laundry, clean the floors or change the light bulbs, according to a White House contingency plan…

Of the 90 people who maintain the President’s family living quarters, only 15 would remain to provide “minimum maintenance and support.”

And apparently in the event of a government shut-down, the US president will have to send home three-quarters of his 1,701 permanent staff.

For some reason the market didn’t like that news. Yesterday the Aussie index fell 88 points. The US Dow Jones Industrial Average dropped 128 points.

It was a big fall for the Australian market. But it’s still above 5,200 points, which is a key level as we head towards the end of the year…

But how much attention should you pay to the US debt ceiling?

After all, this isn’t the first time you’ve heard a bunch of shrieking and wailing as the government nears its spending cap.

So our inclination is to ignore the fuss and use the current pull-back as a chance to buy stocks rather than sell stocks.

Of course, like the boy who cried wolf, there’s always the chance that this is the big one. One day investors will become bored with all the nonsense and decide that stocks can’t rise in this environment, and so they won’t pay the current prices.

This is Why Government Money is Doomed
 

From a philosophical standpoint the market should embrace the idea that the US government is about to shut down (midnight US Eastern time, 2pm AEST).

The less government spends and the less it can inhibit the free market, the more businesses can focus on doing things that really matter – such as innovating, making products and providing services.

This is why, despite the criticism we face from folks who say that we don’t understand the seriousness of the problem, we choose to pay more attention to individual companies and emerging trends rather than whether the US government can afford to pay its bills.

Take the work we’re doing for subscribers of Revolutionary Tech Investor. Technology analyst Sam Volkering has just arrived back in London after spending a week in Dubai at the SIBOS conference.

SIBOS is an annual get-together for the banking industry. They meet and discuss the latest developments – mainly on the technology side – in the financial markets.

While he was in Dubai, Sam met with and talked to some of the people shaping the technological future of money and banking.

But as Sam sees it, as technology moves ahead at a faster speed, the banks will struggle to keep up.

This is another reason why we’re amused by the current fuss over the US debt ceiling. The fact is the whole thing is actually speeding up the demise of government-issued money. Governments have shown that you can’t trust them to look after money, and so at some point the private sector will show them how to do it.

Three charts show how the US government in particular is ‘helping’ with this shift to private money.

First, a chart of the US debt ceiling, which was USD$16.39 trillion at the end of 2012:


Source: Heritage.org

Next is the chart of the US monetary base that shows the extent of inflation and money printing:


Source: Federal Reserve Bank of St Louis

And finally, this chart shows the decline in the purchasing power of the US dollar since 1900:

Would you trust someone who had done that to your money?

The New Way for Money
 

If you gave a friend a loan and he or she used it as capital to borrow more money from the bank and then made you pay the interest to the bank, would you keep handing over your cash?

One day you’d say enough is enough.

And one day that will happen to the US government and every other government that thinks it can borrow without ever paying back the loans.

But will that day arrive tomorrow? Our bet is that it won’t. Instead, our bet is that you’ll see a continued decline in faith that governments can manage money correctly.

This will happen at the same time as individuals transition towards using non-government forms of money. In a way this is here now with PayPal, iTunes and Amazon.

Soon enough the transition will be complete to the point that you won’t store Aussie dollars or US dollars in a PayPal or iTunes account. Instead you’ll store units of currency issued by these private companies.

But whether that happens next year or next decade, one thing is certain: the private sector will easily adapt to this change – including most of the companies you invest in today.

That’s why for all the bumps in the market we view issues such as the US debt ceiling as an opportunity. Anything that hastens the end of devalued government currencies and heralds the rise of secure and valuable private currencies is a good thing in our book.

Cheers,
Kris+

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Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments. Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.
It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for. So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook. Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day. Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read. To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here. Kris is also the editor of Tactical Wealth and Microcap Trader where he reveals the best opportunities he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here or Microcap Trader here. Official websites and financial e-letters Kris writes for:


One response to “How Much Attention Should You Pay to the US Debt Ceiling?

  1. You’re an extremist. Remember it was these “private” companies that needed bailing out in the trillions last crisis. Tax is a way of wealth distribution; as we see in the US, a reduction in tax for the corporations has created wealth inequality so great it was the great depression since such levels where seen.

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