How to Protect Yourself from Washington’s CRAZY Debt Games

We are usually focused on what is going on OUTSIDE America. But sometimes the situation INSIDE America becomes too serious to ignore.

And this is one of those situations.

First, let me say that I have zero interest in partisan politics.

I don’t care about the various claims and counterclaims by Republicans and Democrats as to who is to blame for heaping so much debt on the backs of Americans.

Second, let me say that the political posturing and preening on Capitol Hill…and the gamesmanship over such a serious issue as the credit status of the U.S…is uncommonly silly, even by Washington’s standards.

If America’s political class really wanted to practice balanced budgets, all they have to do is vote against spending measures when they are put before them in Congress.

Trying to cap the debt ceiling now is like trying to balance a household budget after you’ve spent all the money and then deciding not to pay the bills. It’s utter nonsense. And both sides of the House know it is utter nonsense.

Bottom line: This kind of shameful politicking is an embarrassment for America.

It’s All About Timeframes

That said, it is important to keep things in perspective.

The U.S., despite all the electoral posturing, is not about to default on its debt.

Sure, both sides of the political divide will wait until the very last minute to reach an agreement. But an agreement will be reached.

Republicans want to pass a minimal rise in the debt ceiling so that they can return to the issue next year – when President Obama is back on the campaign trail. They want the debt issue front and center in the presidential election, in other words.

Democrats, for obvious reasons, want a more substantial rise in the debt ceiling so that they can sweep the issue under the rug until after the presidential elections.

No Immediate Threat

This is an emotional subject. But you need to understand that there is no immediate crisis in America’s bond market.

Right now, investors are willing to lend Uncle Sam money for 10 years at an interest rate of less than 3%. That’s less than the actual rate of inflation (which runs a good deal higher than the official statistics would have you believe).

America is not Greece. It’s not Ireland. And it’s not Portugal. All of which are essentially bankrupt because they can no longer borrow money in the bond markets.

Nor is America Italy or Spain, where bond yields have risen dramatically recently because of fears over their ability to honor their debt commitments.

The irony of the situation is that traders and investors tend to seek safety in the U.S. bond market in times of market stress – even, it seems, when the stress is being caused by fears over America’s sovereign credit rating.

The Long-Term Story Is Different

But…and it’s a big “but”…the long-term situation is a different story.

It is now abundantly clear that America has a deeply dysfunctional democracy. No country can thrive with that level of cynicism and dishonesty at the heart of its political establishment.

Under these sorry circumstances, it is very difficult to see any genuine budget reform ahead. America’s political class will continue to do what’s best for their election prospects regardless of the damage it does the country.

Ultimately, this is very bad news indeed for the dollar. Which is why I strongly recommend you hold some gold in your global investment portfolio.

As I’ve written about before, gold is the world’s only honest currency. And it will remain in high demand as long as cynicism and short-term thinking rules in Washington.

You can easily buy gold through a bullion-backed ETF such as the SPDR Gold Trust (NYSE:GLD) or the ETFS Gold Trust (NYSE:SGOL).

A good long-term hedge against an eventual fall in Treasury bond prices is the Rydex Inverse Government Long Bond Strategy (MUTF:RYJUX). But this is a long-term play only. Short-term, I don’t see any panic in the Treasury market.