US Government Shutdown

The shutdown of US Government has caused US President Barack Obama to cancel his visit to Malaysia for the 4th Global Entrepreneurship Summit 2013 in Kuala Lumpur last weekend. Obama was represented by Secretary John Kerry.

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US Government Shutdown

On Thursday evening, discussions between Barack Obama and House speaker (John Boehner) ended after 90 minutes with no specific agreement. There is no solution to the current issue of government shutdown. However, both sides said discussions would continue to prevent the US defaulting on its debt obligations.

The current government shutdown is fundamentally due to reaching high dept ceiling. There is no agreement to resolve debt and no agreement to increase debt ceiling. A new budget cannot be agreed on and hence the government has shut down.

The United States public debt has increased by over $500 billion each year since 2003, with increases of $1 trillion in 2008, $1.9 trillion in 2009, $1.7 trillion in 2010, $0.9 trillion in 2011 and another $ 1.2 trillion in 2012.

US Government Shutdown - debt ceiling

What does debt level means? Assuming United States is a person, let’s call him Mr. Richard Lee who holds a Maybank credit card. Mr. Richard Lee’s credit card credit limit is RM20,000. He uses his credit card to buy a new smartphone, go for several vacations, buy a new laptop and ops… He has just max his credit limit of RM20,000. Instead of clearing off his debt, he made a phone call to Maybank to ask for an increase of his credit limit. Maybank credit officer raised his credit limit from RM20,000 to RM50,000. Now, he can continue spending without clearing off the previous debt. What Mr. Richard Lee does next is buy a new massage chair, buy some new accessories for his sport car, and buy some new furniture for his house – all by using his credit card. Very soon, he has again max his RM50,000 credit limit. What he did was, again he went to Maybank to ask the credit officer to raise his credit limit. The Maybank credit officer raised his credit limit from RM 50,000 to RM100,000 and he continues spending.

Mr. Richard Lee’s financial situation and United States debt level is very similar. Every time when they hit the limit, instead of clearing the debt, they are raising it to a higher limit.

When Mr. Richard Lee (as an individual) could not pay off his debt or could not raise his debt ceiling, he has to declare bankrupt. When US Government (as a nation) could not agree to cut on their spending or could not agree on a higher debt ceiling, the government shuts down.

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Despite the short-term pressure on the metals, the Federal Reserve’s continued to create a weaker dollar in the long run, lead to eventual inflation and would boost the prices of gold and silver. The endless easy money policies from central banks around the globe have created a long-term boost for the various precious metals.

Gold is known the best of the precious metals, but as its price has been driven up, retail investors have turned to silver as an alternative precious metal. Unlike gold, the great thing about silver is that there is HUGE industrial demand!

In 2013 there was a significant shortage of both American Silver Eagles from the US Mint as a direct result of record high demand. Silver ETFs have continued buying silver bullion at a record pace. Demand for the metal as a precious holding is there from physical investors, and has helped get silver back to the $24.00 mark. Aside from silver being a precious metal, it also has many industrial and technological applications. There will always be physical demand. Such demand would pick up significantly when the global economy comes fully out of recession.

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As John Kerry said on last Friday (11 Oct 2013), the current crisis US going through is merely an political play and it will be over.

When the economy rebounds, there will be a spike in physical silver demand in many areas. The demand will not be just in coin and bullion form, but also in jewelry, silverware and dentistry. On the technology front, silver is one of the most conductive metals out there, and thus is utilized in photography, electronic devices, optics, medical devices/tools and most recently, in nanotechnology.

Realize that tons and tons of silver are consumed in industrial processes. Some silver are recyclable while most silver is discarded into landfills. Those silver are gone forever. It is believed that 90% to 99% of all gold ever mined is still in existence above ground – in one form or another (such as jewelry and central banks holding). Available physical silver on stockpiles as a percentage of all silver ever mined is so much smaller compared to gold.

Since 1950s silver was consumed in a variety of modern applications at a amazing fast rate. By year 2000, known stocks of silver had shrunk over 95%, to around 500 million ounces. During the late 90s, 200 million-ounce annual deficit indicates the early sign of long term physical silver shortage. Thanks to new technology such as smartphones, demand for silver is unprecedented. Eventually there would not have enough silver to meet demand. The end result will likely be a rising long-term price and intense recycling initiatives (when silver price is high enough).

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2 thoughts on “US Government Shutdown

  1. Believe the USA will raise the ceiling again just like what they have done for many times previously. The market is already participated this, just look at the current share market, not affected at all, still high and strong although it is closed to the due date (3 days to go). The USA will not fall. There will be more QEs and more ceiling raise.

  2. Pingback: Debt Ceiling Raised to 16.7 Trillion | Silver in MalaysiaSilver in Malaysia

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