Economic Reality Setting In

by: Moses Kim

Anyone with a modicum of common sense knows that there has been no economic recovery. Yes we have some GDP growth, but at what cost? Do we really need to run $1.4 trillion dollar deficits to create 2% in GDP growth? Initial unemployment claims are still hovering over 400,000. The number of individuals unemployed for over 6 months is still at record highs. The writing is already on the wall folks: we are in for a world of pain.

Recently the House voted not to extend jobless benefits, which starting December 1st will take billions of dollars in personal income off the books. The net effect is that we should see a rise in the unemployment rate as jobless benefit receivers are forced to look for jobs.

Many economists make the argument that unemployment benefits are an absolute necessity to stimulate the economy. Well let's think this through. Unemployment benefits were extended from 6 months to 99 weeks, and nothing happened. All long-term jobless benefits do is remove incentivizes for people to look for jobs, or better yet, create jobs. I am in favor of short-term benefits, but longer term, you are just triggering a change in psychology. Furthermore, let's not forget we need to borrow from external creditors to meet our obligations. The interest payments on our debt are being shipped abroad, which means we are not stimulating growth domestically.

One of the key metrics to track moving forward is household net worth, since we have an aging population in America keen on retirement. Here is a chart taken from David Rosenberg over at Gluskin & Sheff. As you can see, people have yet to repair their personal balance sheets. The number one reason for this is that housing has not recovered. Where are all the geniuses that called the bottom in housing in 2008, 2009, and again in 2010? No jobs+ no leverage= no recovery in housing. Period.

One of the things I've been harping on is the coming shift in public sentiment. In the short run, the government can get away with deceiving the public that an economic recovery is taking place. Remember talks of a supposed "green shoot" economic recovery last year? At the time, no one in the mainstream media was telling you that this was utter nonsense. Back then, people still held out hope that their homes would recover their values and that jobs would magically reappear. This kept the people relatively silent. Now those hopes of a swift recovery are fading--fast. If France had mass riots and protests because the government wanted to raise the retirement age by 2 years, believe me, it can happen here too.

With a crisis brewing at the state level, there is no way the Federal government can continue to run monster deficits since they will eventually need to step in and save the states. The bloating of the public sector over the years means there will be a lot of future unemployment as the public sector contracts. By extension, this means there are huge unpayable liabilities in state pensions. Remember the huge pension obligations that brought the big U.S. car companies down? Well that's the kind of crisis we are talking about at the state level. We are already seeing some states raise payroll taxes to cover budget shortfalls. Muni bonds are eventually going to be a terrible place to hide- recently they have come under a lot of pressure.

No matter what anyone says, the government is going to raise taxes. Linear thinking economists are telling us that raising taxes will raise revenue to contain our deficit. This is complete nonsense. The tax system in the U.S. is already pretty onerous since even income earned abroad is taxed by Uncle Sam. Americans are notorious for having a narrow perspective, so it is not surprising to me that no one realizes this is not normal. The only reason the U.S. could get away with this system was because the rest of the world was bombed to oblivion following WWII. In the last 20 years or so, the economic playing field has leveled off tremendously as foreigners have embraced capitalism. The effect has been that manufacturing jobs have moved abroad, since capital is self-serving. Don't believe me? Let me ask you then: Where is GM making all its cars now? I can give you a hint- it is not Detroit.

Eventually the government will be so desperate to tax anything and everything that capital will flee America. If you can't tax the big guy anymore, who do you go after? Exactly, the little guy. How will the little guy protect himself? Will he buy real estate and make himself vulnerable to rising property taxes? No. The little guy will run to the safety of gold and silver.

The smart money knows that sooner or later the party is going to end- everything is being reflected in the price of gold. All these genius financial experts were telling us the price of gold was supposed to collapse by now. Why anyone pays these people to get bad advice I will never understand. The coming economic storm is something I will profit from in a big way, but it is not something I want to see. However, I am never going to invest based on how I want the world to be; I will always invest based on how the world really is. Rest assured, the economy is headed toward another crisis. Hence the implosion in U.S. government debt is coming, as is the truly epic rocket launch in gold.

Disclosure: Long gold and silver

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