The everything and the kitchen sink deal reached on the full extension of the Bush tax cuts marks the end of even pretending to be serious about deficit reduction, or even deficit control at this point. With every dollar of deficit above our historical average already being monetized, and with this deal widening the 2011 deficit by an estimated $450-$600 billion, it only means one thing: More quantitative easing, more fiat currency, and higher gold prices. Our newly divided government has shown that compromise will mean the Republicans getting lower taxes, and the Democrats getting more spending. The two can only coexist with the help of the digital printing presses, especially given waning interest in real lenders loaning the US real money as evidenced in the recent Treasury sell-off.
Mounting evidence shows that deficit widening stimulus programs initially sold as temporary, are becoming permanent. The Bush tax cuts for one, but we also have the extension of unemployment benefits, and the extension of the Obama tax cuts which were initially set to expire after one year. Expect to see the aid to states continued when the prospect of it running out becomes dire. There is simply no political will to take anything off the table once it is on, and while divided governments of the past have been marked by gridlock and effectively stepping on the brake pedal, this one seems primed to stomp on the gas pedal with both feet while aiming the wheel straight for the insolvency cliff.
Americans are hypocritical and it is that deep-seated hypocrisy that our elected representatives are representing. This past month, CNN polled registered voters on a series of alternatives indicating the priorities of deficit reduction when paired against a specific program. The results show voters are a long way off from getting serious about the deficit, and politician’s opinions are always a lagging indicator. While 85% are worried about the deficit hurting their kids, and 56% even believe it is likely to cause economic crisis, there is seemingly zero support to actually make any sacrifices to reduce it.
Programs Americans prioritize over deficit reduction and the percent who favor it:
- Social Security 74%
- Medicare 79%
- Medicaid 69%
- Defense spending 49%
- Unemployment benefits 61%
With interest on the debt, that’s 66% of total spending that is off limits. This latest tax cut extension “compromise” is simply an acute example that reflects the vast majority of voters and politicians are more than happy to take something, as long as they don’t think they have to pay for it. We are witnessing the tragedy of public choice theory. Economic theory alone isn’t strong enough to explain how this zeitgeist will translate into a weaker fiat money and stronger precious metals. This is more of a Newtonian physics level of clarity and certainty.
The math is as simple as it is compelling: continued low taxes + continued big spending = continued big deficits. From 2010 until as far as it is prudent to predict, big deficits = quantitative easing. That is good for gold. Finally, never trust a man who claims to be 100% confident about predicting the effects anything as complex and uncertain as unprecedented monetary policy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
