Saturday, May 15, 2010

Lack of a Budget Process Good for Gold, Bad for Us

In a bull market for an asset, the news flow tends to reinforce the theme. Unfortunately, the latest news out of Congress is that is too afraid of giving Republicans a soundbite or two in the upcoming campaign season to actually produce a coherent budget plan. To wit, from Democrats Unlikely to Pass Budget in Face of Spiraling Deficits:

Democrats will likely skip the annual task of writing a budget for the U.S. government this year amid lawmakers’ unwillingness to endorse a plan sure to include huge deficits. . .

The past failures by Congress to pass a budget occurred under either Republican or divided control of Congress, and coincided with election years.

“You have the problem, always, of people not wanting to cast difficult votes in an election year,” said Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat.

“It isn’t the vote people fear, it’s the television ad” by a lawmaker’s election opponent on budget issues, said Steve Bell, former Republican staff director of the Senate Budget Committee. “Given the discontent of the electorate,” Democrats “know how powerful and damaging such ads can be,” he said.

Perhaps in this case it's the knowledge that at least some polling shows that most voters actually want a smaller government that taxes and spends less and that majorities favor repeal of Obamacare. In other words, the majority in Congress was elected because of a perception of Republican corruption and fiscal profligacy. Yet the country got more of the same.

So there will be spending that the majority party wants to hide from. Presumably this is because of large deficits with no intention to ever actually pay the debt. The current best case plans are to roll it over without inflating it away. The argument is made by the Glabraith/Krugman crowd that deficits don't matter, only an "output gap" matters. They care not if there is an output gap in things that were oversupplied, such as homes and autos, due to uncreative Ponzi financing?

The real output gap is honesty out of Washington policymakers.

And so a Western world adrift, short of straight talk from the leaders to a populace that wants it, sees old money move more and more to the oldest money. This trend occurred in the 1970s and took Volcker, Reagan and Thatcher--all with major policy changes and popular support--to reverse the trend toward hard money and back toward paper money. At the peak of gold's mania, its price equaled that of the Dow Jones. If that were to occur again, and the Dow were to stay even, gold's price, which is up 5 times in 9 years, would be up closer to another 10 times from here. Early stage bubble? Could be. Bubble peak? No. Bull market peak as opposed to bubble peak? Sure, could be, who knows?

Just saying. Per old Isaac, something about bodies in motion tending to stay in motion unless stopped by frictional or other forces . . .

The bull market in gold is really a loss of confidence in "paper money bugs". Do you have confidence in Gentle Ben, the European Central Bank, Barack Obama, Britain's divided government, and other Euro-pols? Japan with its endless money-printing?

If you do, go for the fiat stuff. More and more people continue to realize how wrong these guys (and some gals) have been, and are hedging their bets. Right now it's a trickle. The math is such that if most people accept that their money is being trashed for the benefit of bankers, they will realize that the standard allocation from gold-friendly investment advisers of 3-5% of assets is useless. This is why gold retains huge dollar price upside given the way the world is -- or is not-- functioning these days.

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