Christmas has arrived with tax cuts for the rich and more handouts for the unemployed. That is President Barack Obama’s economic plan, and it is not a new one. I’ve been writing about Washington for more than 25 years and the Federal government reminds me of an alcoholic friend who used to say: “Don’t worry; I am going to quit drinking… tomorrow.”
Obama, like so many Presidents before him, pledges he won’t mortgage our children’s future. Yet he and the rest of Washington do exactly that, month after month, year after year. Federal debt could reach $20 trillion in five years. It is hard to know where the breaking point is, but it is out there somewhere and we are headed straight for it.
Fears over the deficit have been going on for a long time. I dug out one of my dad’s newsletters from December 1982 where he declared, “Deficit spending cannot continue indefinitely.” If he were alive today he would be shocked to see the extent to which Federal deficits have climbed.
But just because we haven’t killed our economy off yet doesn’t mean that we won’t. That doesn’t seem to bother Obama, who has been acting like “Bad Santa” on a bender.
Lots of Christmas Cheer for Big Banks
Wall Street’s big banks used government bailouts to post their best two years in investment banking and trading ever. Bloomberg reports heady times for the Big Five — Goldman Sacks, JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley. Together they took in $135 billion from the Treasury Department’s Troubled Asset Relief Program and borrowed billions more from the Federal Reserve’s emergency-lending facilities in late 2008 and early 2009. All that came after the collapse of Lehman Brothers. Since then, the banks have benefited from record low interest rates and the Federal Reserve’s purchases of bonds.
“This is a once-in-a-lifetime opportunity for most of these banks,” said Charles Geisst, a Wall Street historian and finance professor at Manhattan College in Riverdale, N. Y.
Last year, the Big Five generated $127.8 billion in revenue just for debt and equity underwriting and from trading stocks and bonds. They will post almost that much revenue again this year just for those services. What is incredible is that even after being saved by the Federal government — in other words us — we don’t know how fat their piggy banks have gotten because they don’t have to report all revenue streams.
Such accounting doesn’t seem important to Washington. This would explain Obama’s tax cut deal. It is a massive compromise that extends unemployment benefits to the so-called 99ers for 13 months in exchange for a two-year extension of the Bush tax cuts.
Of course the rich like it. As ABC’s David Kerley on World News pointed out: “Extending all the cuts means that someone making $10 million a year will keep $450,000 of their income that would have gone to Uncle Sam… Keeping taxes at this level over the next 10 years could add nearly $4 trillion to the national debt.”
So what is another few trillion dollars here or there? Not much, says the Left, who continue to cry about the unemployment problem; the one that their President was going to fix.
The new Obama deal passed its first hurdle in the U.S. Senate last week. It should make the unemployed happy as well. After all, last year’s gift certificate benefits are running out, “and at the worst possible time,” declare Democrats. After all, Christmas is here!
I have news for the liberals; I too have been laid off a couple times in my life and I can tell you, neither one came at a “good time.”
It’s A Wonderful Deficit
Some Democrats seem to think that Washington has been tighter with money than Old Man Potter in the face of a bank run. That simply isn’t true. In fact, just a few weeks ago the Federal Reserve pumped an additional $600 billion dollars to buy U.S. Treasuries. That’s money that is not even counted on the government’s official ledger. As for Federal government funds, an astonishing amount has been and is going to continue to be spent; a fact that brings peril to the United States.
Meanwhile Obama has thrown his deficit-reduction commission under the bus after it failed to win political support.
"Yields are up… because we got $1 trillion in deficit spending with no signs of fiscal discipline on the horizon," said Julia Coronado, economist at BNP Paribas in New York. "It feels to global investors like the U.S. is becoming Argentina."
The country is facing the prospects of higher interest rates dictated by bond buyers and not by the Federal Reserve. That would put the U.S. into a much worse recession
And then there is the dollar itself. Last week we learned that the Federal budget deficit rose to more than $150 billion last month, the largest November imbalance ever. The Treasury Department says the November budget deficit was 25 percent higher than the $120 billion deficit in November 2009. That leaves the total Federal deficit approaching $14 trillion.
I hate to give away my age, but I was doing research back when the deficit hit $1 trillion. A lot of people back then didn’t think the U.S. economy could withstand such deficits. They were wrong. However, at some point deficits do matter. The best explanation for why comes from the Dec. 13 Christian Science Monitor:
“Every business person, and anyone who has ever managed a checkbook [sic], knows you can’t survive by borrowing 40 cents of every dollar you spend. Yet this is what our federal government is doing — with no real improvement projected even after the economy recovers.
“Tax cuts, trillion-dollar wars, deep recession, and the spending binge of the past 10 years have boosted our national debt to $13.8 trillion, over 90 percent of our total national output (GDP). This is two and a half times what it was 10 short years ago. Underfunded [sic] Social Security, Medicare and other entitlement benefits add another staggering $50 trillion to what the nation is obligated to borrow. That equates to about $200,000 in debt for every man, woman, and child in our country.
“The country is broke and our lenders are about to run out of patience. As it has already done with Greece and Ireland, the international financial community can at any time begin ‘voting with its feet,’ abandoning our debt for safer investments like commodities, land, or foreign securities. Doing so would cause the dollar to collapse and interest rates to surge. This would trigger renewed recession and a sharp decline in living standards since there is virtually nothing we Americans drive, wear, or work with that doesn’t have substantial foreign labor or material content.”
All of which brings me back to gold. I have had the good fortune to write to you for the past year and a half. As many of you know, I have been suggesting that you buy and hold gold. So far it has been good advice, because when I started writing for Personal Liberty Digest, bullion was trading under $900 per ounce. It is currently at $1,400 per ounce, which puts it close to its recent all-time high.
I have been writing about gold for a long time. I was doing it as a publisher in the 1990s and during that period I was dead wrong. But beginning in October 2000 I started writing Outstanding Investments. At the time gold was trading for $285 per ounce. I was telling subscribers that gold was an excellent buy; that they should accumulate as much of it as they could. Over the decade I have not wavered in that advice.
I bring this up not to brag about my record or tell you how smart I am. Rather I tell you this because I often sign off my columns with a few sentences recommending gold. I have noticed a few reader comments that have mentioned that the reason I endorse gold is because I profit from this advice. One reader a while back even suggested that they had seen me on a Florida station pitching gold coins. The truth is, I am not in the business of buying and selling gold.
Also, it is ludicrous to think I can manipulate the price of gold with my columns even if I wanted to. Consider that the average daily volume of gold cleared at the London Bullion Market Association (LBMA) for October 2010 was 17.1 million ounces worth about $20 billion. This means that an amount equal to the annual world gold mine production is cleared at the LBMA every five days.* Gold is a huge market, where price dictates come from central bankers and world leaders, not newsletter writers.
The only thing that helps me out is if I give sound advice. I have been able to earn a living as an investment writer all these years because I have been right a bit more than I have been wrong. Could I be wrong about gold now? Yes. After all, prices are lofty. That is until you consider the amount of dollars floating around the world.
One thing is certain, there will come a time when gold enters into a deep and prolonged bear market. If I am smart and lucky I will notice the signs. When that happens I will tell you, my readers.
Wishing you a Merry Christmas,
Myers’ Energy and Gold Report
* This according to the London Bullion Market Association’s clearing turnover statistics released November 12, 2010. http://www.lbma.org.uk/pages/index.cfm?page_id=51&title=clearing_-_most_recent_figures.