June 21, 2024

Gold Hits New Record High As U.S. Spirals Towards Default

Gold reached all time record highs in Asian trading as legislators in Washington reached an impasse on raising the U.S. debt limit.  Immediate delivery gold soared to $1,624 before pulling back to $1,617.90, up $16.60.

The ongoing fiasco in Washington over increasing the U.S. debt limit has brought into focus the extent to which the United States has become addicted to deficit financing.  Increasing the debt limit to avoid default has become a side issue to worries over the long term ability of the United States to honor its obligations without debasing its currency.

The White House request to increase the debt limit by an astronomical $2.4 trillion, to tide us over for another year and a half, has convinced many investors that a debt downgrade is imminent.

Standard and Poors has already warned that the credit rating of the US might be downgraded regardless of whether a default is averted.  The head of the world’s largest bond fund also predicts that the US will lose its triple AAA rating regardless of how the debt limit issue is resolved.  According to Bloomberg,

“In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,’’ El-Erian, the Newport Beach, California-based chief executive officer and co-chief investment officer at Pimco, wrote in an e-mail.

The highly polarized negotiations going on in Washington reflect the ultimately self destructive nature of democracies.  Voters have collectively elected a political class who have promised benefits that are financially impossible to honor.  The tipping point has been reached and the political will to fix the problem is overridden by numerous special interest groups who demand that their benefits be preserved and increased.  In a collective pact of economic suicide, voters are demanding benefits from a wealth redistribution scheme that will eventually make all of us equally poor.

Writing in the Wall Street Journal, Arthur Brooks discusses whether the welfare state in the US has reached the tipping point.

The Bureau of Economic Analysis tells us that total government spending at all levels has risen to 37% of gross domestic product today from 27% in 1960—and is set to reach 50% by 2038. The Tax Foundation reports that between 1986 and 2008, the share of federal income taxes paid by the top 5% of earners has risen to 59% from 43%. Between 1986 and 2009, the percentage of Americans who pay zero or negative federal income taxes has increased to 51% from 18.5%. And all this is accompanied by an increase in our national debt to 100% of GDP today from 42% in 1980.

In the other scenario, our welfare state slowly collapses under its weight, and we get some kind of permanent austerity after the rest of the world finally comprehends the depth of our national spending disorder and stops lending us money at low interest rates. (Think Greece.)

John Sununu, writing in this week’s Time Magazine, makes a similar point.

We all know the nation’s budget is huge, but nothing drives the point home like the number of Americans receiving financial support. Add Medicaid, farm payments, housing subsidies and others to the list, and roughly 47% of all Americans are receiving at least one federal benefit. Tax preferences, like the deductions for mortgage interest, retirement savings and health care, bring the number closer to 75%. The dirty little secret about America is that being on the dole is no longer an exception but the rule.

Voters are characterized according to the programs from which they benefit.  Instead of Americans, we are retires, veterans, farmers, teachers, investors and students.  We have become a nation of spending constituencies.

The entire developed world has taken on financial obligations that are impossible to meet and no longer possible to finance, as we have seen in Greece, Portugal and Ireland.  The relentless rise in the price of gold reflects the desperate efforts of social welfare states to meet their obligations through currency debasement and ballooning deficits.

Jim Rogers, in a Bloomberg podcast, said it best – “I have not sold any gold, I have bought more gold.  If gold goes down I’ll buy more. The price of gold is going to go much, much higher over the next decade.”