Anandakos

Gold: The Only Remaining Bubble?

Austrian,

You have slandered George HW Bush and Bill Clinton unwittingly and unjustly. The US government went on a THIRTY year deficit spending spree when Ronald Reagan cut taxes so dramatically in 1981. It is true that he rectified some of the shrinkage in the next two years with partially compensatory increases, but he set the stage for thirty nearly uninterrupted years of spiraling debt. Bush 41 made an attempt to right the ship and lost his second term, and then Clinton pumped more water out and lost Congress. By the end of Clinton's term -- partially because of the DotCom boom but mostly because of the 1993 tax increases -- the government was running an overall surplus. No, it hadn't gotten back to a full operating surplus as it should have, but it was a lot better than anything since Kennedy's term.

People will argue forever about the proper proportion of GDP to devote to government activities, but one thing is not debatable: the only long-term (greater than 10 years' duration) debt that the government should accrue is for genuinely productive infrastructure investments and the cost of wars of defense. It's fine for it to run temporary (3 to 5 year) deficits during the low part of business cycles, but it has to liquidate the debt in the high part of the cycle.

The problem is that selfish people say "we have to give the people their money back" in the high part of the cycle, so the debt has only rarely been liquidated.

On Feb 18 04:14 PM austrian63 wrote:

> Gold is simply a safe haven. Your arguments against inflation are
> not correct. I challenge you to research and publish the actual
> year over year rate of deflation (reduction in the general price
> level) in Japan during the 1990's. In fact, you must strip out real
> estate, equities and fuel from your rate. Then see if actual daily
> costs, food, insurance, health care, wage rates, commodities, etc.
> actually were in a "deflationary spiral." I bet the rate of general
> price decline in the daily costs of living will surprise you by how
> small it was and that many costs actually increased.
>
> General price level declines are not possible in fiat currency economies
> as the paper money is not backed by a tangible asset.
>
> I also disagree with your asessment of the Treasury bubble or lkack
> thereof. This is the current bubble and when it pops, gold will
> probably become more of a safe haven. Treasuries, and the dollar,
> are only backed by the "full faith and credit" of the U.S. Government
> which has no ability or intention of paying off its debt. Here are
> the "assets" that back the dollar and Treasury Debt Securities:

>
>
> The U.S. tax revenues, which are decreasing.
> The U.S. budget deficit which is increasing-lack of fiscal discipline
> usually harms borrowers-it will eventually harm the U.S.
> The U.S. trade deficit is large and will continue in perpetuity.

>
> Unfunded Social Security and other entitlement liabilities
> The now "unknown" assets on the Fed's expanding balance sheet.

>
>
> Once holders of treasuries realize this, they will begin to liquidate
> their treasury holdings as their yields are not compensating them
> for their risk. Moody's created a new AAA rating for the U.S. and
> the U.K. that states these countries' securities are "AAA with a
> risk of default." The U.S.'s sovereign rating is now lower than
> Norway's.
>
> In my college finance courses years ago, the Treasury rate was the
> "risk free" rate. I suppise things change when a nation goes on
> a 20 year deficit spending spree. The U.S. is broke and mathematically
> insovent. Treasury yields will eventually reflect this.
>
> It will be interesting to see how our government addresses these
> issues as they begin to bubble up.