Tuesday, February 2, 2010

We Have Met the Fiscal Enemy, and We Are It

Deficits 'R Us!

The administration is planning more "stimulus" and another trillion dollar-plus deficit, while trumpeting a small "freeze" on certain programs. The budget apparently also assumes revenues next fiscal year from a cap-and-trade bill that appears to be permanently stalled, as well as from politically difficult cuts/freezes in such matters as farm payouts. There is no hope, and the unfunded liabilities continue to accrue off-balance sheet in addition to the deficit that is put out there for public consumption.

If one believes in balance as an important part of life, then financial imbalances strike one as inappropriate.

This government continues to borrow massively for routine expenditures on the elderly and poor. This administration has chosen to surge in Afghanistan. These expenditures are what are driving the budget deficit.

Keynes envisioned true surpluses in good times to balance deficits in bad times. This has not happened for decades. The years of gridlock when Bill Clinton was president did see balanced or surplus budgets on a cash basis, but all the while unfunded liabilities were accruing each year that substantially exceeded any cash surpluses. Any business would have shown deficits year after year.

America's day of financial reckoning is approaching. An inflationary straw in the wind is the obscure issue of the Fed considering paying interest on bank reserves. Anyone who understands banking knows that the whole point of a reserve at a central bank was to restrain inflation and have a stable amount of capital that specifically did not earn interest. A better way for the Fed to reverse its money printing would be for it to sell its securities into the marketplace as the economy improves.

From an economic and financial standpoint, the simplest way out of the budgetary crisis is to diminish expenditures that have little, no or negative return on investment and support those that ultimately bring in revenue. Thus this means spending fewer taxpayer dollars on intensive medical treatments for the elderly unless the public specifically votes for much higher taxes to support this worthy humanitarian practice.

It would also mean relatively fewer taxes on labor of all sorts, whether that labor is physical, white collar or managerial.

The accounts will balance in the end, one way or another.

Just as the elected representatives of the public specialize in a grand extend and pretend strategy, so do investors and speculators in the financial markets. The money-printing is having an effect, but given the depression in residential housing, the largest driver of economic expansions is to a large extent missing in action and thus the money-printing has gone, as it were, to shoring up the foundations of the economy rather than to expansions.

Thus we see many 2-year charts of such assets as numerous listed stocks, the Aussie dollar and silver that failed to exceed their 2008 highs despite a large % move off their bottom, and have now begun to roll over.

It is thought at Econblog Review that the best assets are those that are in structural bull markets, meaning that they have gone to new all-time highs and have not corrected a lot; or, secondarily, assets such as Chubb or Everest Re that are financially rated as very strong, have dividends etc., and have stock charts that are in good measure uncorrelated with the averages.

We may be moving to a situation similar to that which supervened in the 1940s and the Korean War years in the 1950s. The Fed and public mood kept short rates very low, while inflation ramped up substantially.
Then, however, stocks had high dividend yields and there were numerous AAA-rated American corporations.

The hollowing out of America is in large part financial; the famous industrial hollowing-out is an outgrowth of the hollowing-out financial strategy.

The above encapsulates the fundamental case for gold, and for only gold. Not silver or a non-U. S. fiat currency. For better or worse, gold is the ultimate, time-tested store of value that simply is what it is. It just sits there quietly and boringly, not tarnishing or creating any new wealth. This is true even though gold derivatives have been created and physical gold may have been pledged as collateral by various parties.

Currently, given governmental fiscal irresponsibility and the lack of a fully energized public, gold is, despite its many investment risks and shortcomings, the asset class with with (unfortunately) I feel most comfortable.

If and when difficult decisions are actually made, as they were in the early 1980s here, gold would probably become an asset to largely avoid. We can only hope.

Copyright (C) Long Lake LLC 2010

1 comment:

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