According to unnamed sources at the Treasury Department the federal government is working on a novel plan to get around, at least temporarily, the looming battle to raise the debt ceiling.
Apparently secret private negotiations between officials at the Treasury, officials at the Federal Reserve and their counterparts in China and India have been ongoing for several weeks now.
The subject of their intense discussions has been "gold".
For those that may not realize it the US is the world's largest single holder of gold. Deep underground there is over 8,000 tonnes of the precious metal packed and stored safely away. If you have been paying attention to the business news you may also be aware that the price of gold has been reaching new heights of late, and just today climbed very close to $1500 an ounce.
If you are wondering where the US got all this gold that it "owns" - well thank FDR who in 1933 ordered all private gold be turned over to the government in exchange for $20.67 of cash per ounce. It was a pretty brutal confiscation of peoples' private property, but present day citizens are the beneficiaries because almost 80 years later gold now sits 71 times higher in price. And Republicans say governments don't know how to run a business or make a profit! Hah!
Well apparently some wise apple at the Treasury Department figured out that all the gold just sitting there in storage waiting for a rainy day is now worth close to $386 billion. She figured out that, for the next few months at least, if the Treasury sold off the gold bit by bit it would not need to issue any new debt. The draft calculations estimate that the country could avoid issuing any new debt for up to 3 months by selling off all the gold.
Of course there is one big problem. Trying to sell that much gold at one time would likely depress the price quite quickly. That's where China and India come in. China has been encouraging its citizens to buy gold as an investment (and as an alternative to investing in the overvalued housing market). In fact it is very very easy to buy gold in any town in China. The problem for the Chinese is getting enough gold, without pushing up the price too quickly.
So you have a potential buyer with lots of cash and a motivated seller with something to sell. It's a bargain waiting to be consummated. China takes $300 billion of its FX reserves (now at about $3 trillion - so it would only need to use 10% of its reserves), and buys most of the gold. India would agree to pick up the rest. The transaction price is rumored to be somewhere above $1400/oz.
Its expected that the deal will be hammered out over the next week or two with an announcement being made in conjunction with the next Federal Reserve meeting on April 26/27.
Because the US is issuing on average about $5 billion of new debt per day (averaged over 365 days per year), and if it can net say $350 billion from the sale, it should be able to buy an extra 70 days of "debt ceiling leeway".
The only potential problem noted by some commentators is that no one has actually audited the US government gold holdings in decades, so there are some that wonder if this gold still actually exists in physical form in the possession of the government. But we have to assume that China/India will not hand over the money without actual physical access to the gold - although in the past some foreign governments have allowed the Fed to hold their gold for them. Somehow I doubt China/India will go for payment without possession.
All in all a pretty good deal. The US gets rid of its horde of the "barbarous relic", and gets on with more efficiently printing the money its needs while at the same time it helps soak up some of China's FX reserves. I mean what are the chances that gold will keep going up in value just because the US is printing more money?