Is The National Debt Irrelevant And Gold A Barbarous Relic?

Synopsis

• Presidents campaign on promises to reduce an out of control national debt yet the debt keeps marching higher during every Presidents term.
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• The National Debt has been irrelevant since the times of even before Reagan but escalated with Reagan. Why doesn’t the national debt matter?
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• What will Fed interest rate policy be moving forward?
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• Some mock gold as a barbarous relic. Gold & silver maintain purchasing power over time. Dollars pay interest. One of these has over $20 trillion of debt backing it.
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• Asset allocation says take from what’s high (stocks) & put it into what’s low (metals). Stocks are going to have issues into the end of the year but not yet.

When it comes to the national debt, it amazes me how the debt is such an important Presidential campaign issue to criticize the past President while running for office, but once that President is elected, Congress and special interest groups take over and get to work spending every dime and more through the process known as legislation. It is Congress’ job to “raise and provide public money and oversee its proper expenditure.”

Of course the words “proper expenditure” Congress ignores.

There are no better spenders than those in Congress.

Projected outlays over revenue is quite large for the next 10 years as the following Congressional Budget Office, CBO shows, and this is when most would say the economy is doing just fine.

Congress takes out the government checkbook and the debt goes up every year as Presidents sign the budget legislation they create for future spending.  Threats of government stoppage subside and both parties agree to dig us deeper into debt while promising they will balance the budget down the road.

The problem is, Congress doesn’t look past one year out before changing the budget again to accommodate for their previous miscalculations. Take a look at how far they were off on interest payments alone, while interest rates were at historic lows. Is it out of line to speculate they won’t get it right when higher interest rates come?

Higher rates will take up over half of all income taxes to service the national debt in just 2 years by 2020 according to the most recent CBO projections. 

The following is a video I created with the last 3 Presidents actual comments about the National Debt while campaigning for office and what has actually occurred since they took office.

Why Doesn’t the National Debt Matter? 

One of the main reasons the surging national debt doesn’t matter is it hasn’t hurt the dollar as the U.S. is the world’s largest economy as well as wealthiest.  The dollar (DXY) is sitting at the November 2016 highs, just before gold took off in price.

The U.S. is the one meddling in everyone else’s affairs and we continue to do so in support of an alleged strong dollar policy that has most of the rest of the world trading in dollars not Yen, Euros or Renminbi.

The perception is that the U.S. government and central bank are in control of their future and somewhat the bully in the room. It’s business as usual and the financial media ignores the elephant in the room (debt). My job is simply to discuss the elephant in the room before it starts stampeding and an end game surfaces.

So What Is the End Game? 

This is the question that needs to be asked now because ignoring it means your portfolio may suffer consequences.

Fed policy of raising rates is presently killing housing with U.S. housing starts falling 12.3% in June and existing home sales also falling with both readings revised lower from prior reports.

Did someone think taking rates higher when the economy was not ready for it was a good thing? Did someone not remember the last time the Fed did that in 2004 to 2006?

If anything, the Fed by raising rates can give them some firepower to combat the coming recession with interest rate cuts. I realize with the S&P around 2800 and Dow back up to over 25,000, most aren’t contemplating a recession. I am.

But while some are talking about the possibility of ending QT (quantitative tightening) soon with this type of housing data, and introducing QE again at some point should we get the deflationary credit contraction I have spoke about in my last 2 articles, I am taking it a step further with some research and putting some pieces of the puzzle together.

I think there is a real possibility, in an extreme “save the system” kind of move, that we might experience negative interest rates. 

There is a reason why intellectuals such as Harvard Professor Carmen Reinhart write about negative interest rates in various publications. It’s not discussed today in financial media at all, but if someone who serves in the Economic Advisory Panel of the Federal Reserve Bank of New York is writing scholarly papers about this potential, which Reinhart is, then one must assume it is a possibility. This article makes the case for that possibility.

Reinhart writes about this possibility in The Liquidation of Government Debt and negative real interest rates. Her conclusion from her research was that lower rates are a solution to the National Debt overhang. You heard that right. I know many are saying that inflation will wipe out debt, but those who keep calling for a dollar crash or hyperinflation every year have missed the boat. They have not given the Federal Reserve enough credit.

Here is what Reinhart has to say about how negative interest rates could reduce debt; “The substantial tax on financial savings imposed by the financial repression that characterized 1945-1980 was a major factor explaining the relatively rapid reduction of public debt in a number of the advanced economies.”

She points out our past times of financial repression below, as well as the solutions of actually lower rates, which we have been doing as a country now for decades. And there is some precedence for this when things got too bleak.

Is Gold A Barbarous Relic? 

Many claim that John Maynard Keynes said that gold is a barbarous relic. In fact, it was the gold standard he was referencing in his 1924 book on monetary reform.

The way gold has been acting of late, many might consider it to be a barbarous relic. I made a comment on one of Avi Gilburt’s article’s recently that is worth repeating here.

Most don’t know the history of the U.S. dollar and its relationship with the Federal Reserve, but a good chronology from Reinhart and some of her colleagues follows. Notice that we have what is deemed a “Freely floating” classification of the U.S. currency today evolving from what was the original gold standard.

You could probably add SEC Money Market reform to address runs on them as well. Or raising the FDIC coverage to $250,000.

It has been 47 short years since 1971 and in that time we can see where Congress has taken us, even before Reagan. Warren Buffet’s warned what would occur if there was no restraint on Congress back in 1948 when he was fighting to keep a gold standard. He said;

I will not take time to review the history of paper money experiments. So far as I can discover, paper money systems have always wound up with collapse and economic chaos. From 1930-1946 your government went into the red every year and the debt steadily mounted. Various plans have been proposed to reverse this spiral of debt. All of these proposals look good. But they are unrealistic under our paper money system. They will not stand against postwar spending pressures. When the people’s right to restrain public spending by demanding gold coin was taken from them, the automatic flow of strength from the grass-roots to enforce economy in Washington was disconnected. Before 1933, whenever the people became disturbed over Federal spending, they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington.

My point with writing about a gold standard is not to bring it back. We have lived the best years of our lives since we left the gold standard in 1971. For many, wealth beyond our imagination, if they had the right connections in the business world or simply by hard work and/or inheritance. Even entitlements have made it so some have lived better than most in other countries. It can continue longer if Congress discovers fiscal responsibility. But you can’t even write that sentence without snickering as the terms Congress and fiscal responsibility are oxymorons. We have sold our soul to the company store though.

Outside of iPhones (AAPL), movies (NFLX), social media (FB) and search engines (GOOG), along with where most buy things these days; Amazon (AMZN) we are just pushing money around here in the U.S. GDP hasn’t been over 4% since 2012, even though projections for GDP from the St. Louis Fed for this next report (GDPNow) are up to 4.5129%. That math to me doesn’t add up.

Eventually, Fed policy is what will screw things up. It always has. And their way out with negative interest rates may surprise many and this article points to the fact that it is an option they have discussed.

Before World War II, the outright write-down of debt in advanced countries was common and consequential. Debt restructuring and default more commonly hit external debt because the “softer” options of inflation and financial repression are not available. Even so, it sometimes occurred in the case of domestic debt with one notable episode being the abrogation of the gold clause by the United States during the Great Depression (Reinhart and Rogoff, 2009).

Reinhart concludes,

Indeed, the message from dozens of episodes of significant debt reductions in advanced economies since the Napoleonic War is that everything is on the table” from ” both orthodox and heterodox.” A good example of heterodox is that notable exception, the confiscation of gold in 1933, and shows you to what depths governments will go to in times of economic turmoil. That or simply “taxing wealth and generating unexpected inflation.

The Fed can’t continue the game without production, even with lower or negative rates. It is the fruit of our labor that makes GDP work. They tax our labor and make things more expensive here with the trade wars to cut into consumer spending as savers hoard, or replace humans with automation giving us less to spend as wages stay stagnant. How can this end well?

At least one can create their own gold standard, to protect or insure wealth today. And of course, invest in other assets that can grow (this is the part where in the comment section you’ll get your usual gold naysayer trying to say stocks are better than gold. That’s not the issue here so please refrain from such comparisons. Gold is a currency and yes, can be compared to the dollar).

Gold has been weeded out of the system almost completely, except for the fact that most central banks still own it to give the illusion that it backs a countries fiat currency. We clearly see those that advise the Fed leave all options on the table. Realize that these options are typically reactive to failed Fed policy to begin with as there are no constraints on Congressional spending. To ignore the elephant in the room of debt is paramount to simply ignorance of why gold has outlasted all government’s interference in the monetary system of every country ever. Merriam-Webster definition of insurance: a means of guaranteeing protection or safety. That’s what gold represents to me.

Which of these ways to reduce debt below will our economic advisors and leaders choose?

That’s what it comes down to. It’s not going to be number 1 or 2. Inflation was a mystery to former Fed chairman Yellen (who I don’t think understood the effects of credit reduction swallowing up any inflation).

This also means Bernanke’s; Deflation, Making Sure “It” Doesn’t Happen Here scenario isn’t or won’t necessarily pan out because of the decades of credit expansion that needs to unwind.

So #4 seems to be less of a possibility. That leaves #3 and/or #5 as the leading candidates. Hold rates lower or even have them go negative per Reinharts work above, have the Fed buy up anything and everything if necessary and do whatever they can to keep the mess they created afloat. They’ve done it more than once and will not hesitate to do it again. Reinhart claims that only 4 and 5 are viable for domestic-currency debts. As Richard Russell used to say; “Inflate or die.”

Gold and silver can be insurance against monetary mishaps over time. It doesn’t mean that big money can’t push the yellow metal around or even confiscate it again. They will give you fair value at that time in Federal Reserve Notes should that come to fruition.

Of course hopefully by that time you will have exchanged the higher priced metals for something else beaten down. That’s how asset allocation models work.

The government has put our future generations in the hole to the tune of trillions as we have shown above, and don’t really care about anything except for maybe Rand Paul who has been a sole thorn in the side of Congress.

Even he can’t move budgetary mountains. And please note that I didn’t even touch on mandatory spending that will most likely increase for Social Security, Medicare, Medicaid, and all the other entitlements that are mismanaged as the U.S. government feeds upon itself until there is no more to devour.

There is no stopping Leviathan from devouring everything it its path.  “Who hath prevented me, that I should repay him? whatsoever is under the whole heaven is mine.” Job 41 v 11

To make matters worse in the government grab for control of our future, the education system our government created has made students debt slaves and any future extra income they may want to use to buy stocks goes to some entity the government guarantees gets paid for the loans the student took out. If you think students are struggling now. Wait till their rates go much higher in the future.

Sure, a lot of this outlook is a ways off as our system isn’t going to collapse overnight.

But if you listened to my last two interviews, I do make a case for trouble to come to markets in October, pre-midterm elections or into the end of the year. I personally trade both sides of the market with one of my companies and don’t care what the market does as long as I am on the right side of it.

I do admit gold has got the best of me the last month or so, but am holding on for what I see is a run higher into the end of summer still before the October troubles. President Trump is even Tweeting to the Fed and other countries who are manipulating their currencies and that is telling as to what length he may go to in stopping the dollar’s run. Micro view on the dollar and markets for me is down from the 2812 level for /ES and 94.67 level for the dollar (DXY). Gold (GLD) up after this hammering it is taking. Gold support is $1,220 right now. Like to see it hold. As I type the low is $1,221.80 (7/23/2018 6:30PM EDT submission to editors).

The stock market could take off to new highs still into that pre-October top I see after a Fed reduction in their balance sheet sell off to the end of the month or so (which it has followed this pattern the last few months). I welcome that rise again if it comes. Go ahead and invest in the stock market on any dip.

If you think you can hold index funds and they’ll get you through the next recession, the type of decline that most financial advisors and everyone at CNBC, the Fed and Congress didn’t see coming in 2008/2009, then more power to you. It’s not going to be pretty and can occur quickly. All I am saying is think about what asset allocation models dictate and put some money from what is high and stick it into some of what is low.

And to be clear, gold fell 30% in 2008 too and while I view physical gold and silver as insurance, I am only recommending half an allocation into precious metals today and the other half on that dip I see coming when the deflationary credit contraction occurs.

It also rose faster than the stock market to all-time highs in just a couple years until the stock market got its mojo back after the Fed implemented the addition of about $4 Trillion to their balance sheet.

Still another amount of debt that one should be concerned with not addressed above. What do you think the Fed’s balance sheet would look like after the next recession? Why is the next recession any different than the last recession?