But let's be optimistic: If the budget could be balanced, then the fact that the debt ceiling was being increased yet again would not be so awful. Since the U.S. government's fiscal policies would be completely reversed, we could expect to start seeing a strengthening of the dollar (so long as Bernanke stopped the printing presses, too) and a weakening of gold and silver.
However, this is just as much of a pipe dream as the first scenario. No government in history has dug itself out of the hole we now face without defaulting. If Congress even tried to enact a plan like this, people would be rioting in the streets over their lost entitlements. And we'd suddenly have millions of unemployed soldiers. Not exactly a recipe for peace and prosperity.
Bulllish Case No. 1:
The debt ceiling is not raised and the U.S. defaults on Treasury debt.
This is the scenario that President Obama and Secretary Geithner are threatening. They claim that if the debt ceiling is not raised, they will have to immediately begin defaulting on Treasury interest payments. This is rather unlikely, as interest payments make up only 10% of spending, but let's say they stop paying anyway.
If they do this, market interest rates for U.S. debt would skyrocket, meaning the only buyer left at rates the Treasury could afford would be the
. In other words, if they default on August 2,
will start on Aug. 3. Of course, a default would be absolutely devastating to the dollar and a boon for gold and silver. Global confidence in the invincibility of the United States would be shattered, and the underlying problem of excessive spending would still remain to be addressed.
Another interesting scenario would be if Congress didn't raise the debt ceiling and the Treasury just kept borrowing anyway. It's not like the Executive Branch follows laws scrupulously nowadays. What if they just ignored it? Someone could challenge the act in federal courts, but the odds are often in the president's favor. In this case, gold and silver might experience less of an initial spike, but their long-term prospects would be elevated as the world recognized that we were one step closer to becoming a banana republic.