As I previously wrote:
Gold has surged to new record highs above 1450.00 as the political circus over the budget and debt limit ramps-up ahead of a potential government shutdown on Friday. The President has summoned leaders from both political parties to the White House this morning with the hope of nudging them toward some kind of compromise that will allow the government to continue functioning after the end of the week. While Mr. Obama has expressed optimism that something can be worked out, it seems that the parties have dug in their heels.
The first order of business is to come to a decision on budgetary matters for the remainder of FY2011. A patchwork of CRs is no way to run the world's largest economy, particularly during a time of economic duress. Arguably the uncertainty is hindering the recovery as our Representatives squabble over chump change. As I pointed out in the same report cited above (referring to PIMCO's Bill Gross), when unfunded entitlements are factored into the equation, we're already facing a $75 trillion total debt burden. So, whether you're talking about cutting $30 billion or $100 billion from current spending levels, in the long run it's all rather pointless. It's theater for those who still think $100 billion is a lot of money.
When Paul Ryan, Chairman of the House Committee on the Budget, offers up a plan for the FY2012 budget that he claims will reduce the deficit by $4 trillion, it certainly sounds more serious. The "T" word still has some impact. However, $4 trillion is still just over 5% of that $75 trillion total debt burden and the plan calls for that reduction over a 10-year period, or $400 billion per year. More serious? Yes. Serious enough? Doubtful.
Ryan's plan is called the The Path to Prosperity: Restoring America’s Promise -- catchy -- and is being pitched as a choice for two futures. According to Ryan (who cites the CBO), on the current borrow-and-spend path, the U.S. economy will reach a critical debt-induced tipping-point by 2037. In looking at the above chart, no rational American would choose the current path. Yet American's are deeply divided on how a more sustainable path might be achieved, how the burden should be shared, or whether it should be shared at all. Even ardent supporters of drastic budget cuts and deficit reduction, when polled on specific programs, tend to favor continued funding for most of those programs. The job of actually cutting is not going to be an easy one, and the backlash against Ryan's proposal has already begun in earnest.
In March alone, the federal government spent eight times the amount of revenue that it took in. The difference was, of course, borrowed. I think everyone would acknowledge that something must be done in order to prevent a full-fledged debt crisis in America. Sadly, I think Bill Gross' guess on what that something might be is closest to the truth. In PIMCO's Investment Outlook for April, Gross said:
Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.
Early in the month of March, Erskine Bowles, the co-chair of President Barack Obama’s National Commission on Fiscal Responsibility, told the Senate:
I think we face the most predictable economic crisis in history. A lot of us sitting in this room didn't see this last crisis as it came upon us. But this one is really easy to see. The fiscal path we are on today is simply not sustainable.
This debt and these deficits that we are incurring on an annual basis are like a cancer and they are truly going to destroy this country from within unless we have the common sense to do something about it.
Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, has been saying for nearly a year now that the greatest threat to America is not a military one. In Mullen's opinion, "The biggest threat to our national security is our debt."
The $14.29 Trillion Debt Ceiling
Yesterday, Treasury Secretary Geithner sent a letter to Senate Majority Leader Harry Reid, predicting that "the debt limit will be reached no later than May 16, 2011," and that there would be dire consequences if that were allowed to happen. Geithner acknowledged that his options for delaying reaching the debt ceiling have become increasingly limited as the debt has grown. He dispelled the notion that further delay could be achieved by, for example, selling the Nation's gold reserves. Geithner warned that such a move "would undercut confidence in the United States both here and abroad." Hardly what one might expect if you view gold as a useless relic.
Geithner attempts to provide some comfort by reminding us that “increasing the limit does not increase the obligations we have as a nation; it simply permits the Treasury to fund those obligations that Congress has already established.” What he doesn’t say is something I've been saying for years: The U.S. government has never met a debt ceiling it couldn’t meet and ultimately exceed. According to the Treasury Secretary, there is simply no option: The debt ceiling must be raised or the U.S. faces a default. However, in doing so, it pushes us toward that same end result.
The recent collapses of the governments in Portugal and Canada, along with the geopolitical unrest throughout the Middle East and North Africa, remind us of just how quickly governments can become destabilized. I don't think America is anywhere close to that point yet, but faced with a possible shut-down of the government and the inability of the government to finance the debt going forward, Geithner warns that "government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds." One would have to acknowledge that we seem to be hurtling ever closer to the precipice.
Gold has served as a store of wealth for thousands of years, through wars, economic calamity and of course political uncertainty. Gold is a physical asset that is not simultaneously someone else's liability. It tends to be non-correlated with more traditional asset classes like stocks and bonds. Perhaps most importantly, given Gross' warnings, it tends to have an inverse correlation with the dollar. The appeal of gold as a shelter for stormy times is likely to continue to grow, even as supplies become tighter, which will have a supportive impact on the price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.