Once again, the U.S. Congress is embroiled in a fight over funding that could lead to a government shutdown. And according to Moody’s Investors Service, which Bloomberg notes is “the only remaining major credit grader to assign the U.S. a top rating,” another shutdown could mean a loss in that top rating. But what does that really mean, and what would it mean for you?
To help explain the finer details of what this could mean for you—our clients—I turned to Brad Chastain, our Director of Education, and Philip N. Diehl, President of U.S. Money Reserve and former Director of the United States Mint.
According to our Director of Education, a drop in our nation’s credit rating wouldn’t heavily impact the use of U.S. Treasuries as preferred collateral.
In past editions of “Gold News & Views,” we’ve discussed how U.S. Treasuries are the preferred form of collateral between financial institutions around the world. But since these are essentially loans to our government, would a lower credit rating affect their popularity?
That’s unlikely, according to Brad Chastain. “Credit quality isn’t very relevant from a collateral standpoint,” he says, noting that since repo markets (those for short-term secured loans) are all about liquidity, with Treasuries often being bought and sold overnight, long-term ability to repay isn’t as important. “Treasuries are the deepest, most liquid securities on the planet, and that’s all that matters in the market for wholesale money.”
So from this point of view, a shutdown would not necessarily expose your portfolio to greater risk if you choose to include U.S. Treasuries as part of your diversification strategy.
According to Moody’s, a short-lived government shutdown may not significantly impact the economy—but it wouldn’t look great for America.
In its report released Monday, September 25, 2023, Moody’s analysts noted that while “debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of U.S. institutional and governance strength relative to other AAA-rated sovereigns.”
So by Moody’s own accounting, a brief government shutdown won’t likely send us spiraling into a new recession. Instead, the real impact might be to our nation’s reputation on the world stage.
For more information, I spoke with Director Diehl. We often discuss Philip’s time as Director of the United States Mint, but in his long and distinguished career in public service, he also served as majority staff director of the Senate Finance Committee.
He seemed to agree that Moody’s analysis is focused more on governance issues than an ability to repay debts, but also noted that were we to experience an actual deterioration in governance—such as an inability to agree on military funding, which historically has had broad bipartisan support—it could pose “serious threats to our economy.”
In times of political and economic uncertainty, Americans continue to look to gold to help protect their wealth.
While a credit downgrade may not directly impact your portfolio, the underlying reasons why our nation’s credit may be downgraded—in particular, political uncertainty—could contribute to future economic volatility. This presents us with an opportunity to act now to help protect our own financial well-being.
You may have previously seen or heard us refer to physical gold as “wealth insurance.” This is because gold has historically been recognized as an asset that can maintain or even grow its price during times of economic volatility. When markets are experiencing increased levels of uncertainty, many Americans look to protect their wealth by diversifying away from paper-based assets like stocks and instead turning to time-tested assets like gold.