The Market Oracle
APR 9, 2018
It is a unique time in American economic history. Despite a stock market near all-time highs and unemployment levels at historic lows, we have interest rate levels also near historic lows. If you had any sense of history but no idea where the Fed rate was, and were given a brief rundown of stock market valuations, inflationary pressures, and corporate/household debt levels, a shrewd guess would be rates at or above 5%.
It would be obvious that someone left the stove on when they went on vacation, that things have run far too hot for far too long. And yet here we are. The Fed rate remains at a massively accommodative 1.75%.
It is the state to which the state has devolved. Debt for all, without limit or end, because if the house isn’t on fire right now, what’s the harm of a little more gasoline?
A billion is hard enough to imagine, much less a trillion. But let’s try. We can write it as 1,000,000,000,000 – that’s a 1 with twelve zeroes. In other words it’s a million million. One trillion of dollars in $100-dollar bills would stack 631 miles high. Given that the average annual income in the U.S. is around $50,000, Joe Schmo would have to save 20 million of years (and not consuming at all) to stockpile a trillion dollars.
It escalated really quickly. In September 2017, we reported that the total value of U.S. national surpassed $20 trillion. In March, after just half a year, the U.S. federal government added another trillion of debt. And what is even more important, the U.S. indebtedness is not likely to decrease anytime soon. Actually, the Congress has just agreed to cut taxes and spend even more. It will add even more obligations on top of an already existing pile of debts.
And according to the Treasury Borrowing Advisory Committee, the U.S. federal government will have to borrow about trillion in fiscal year 2018. It implies that at the current pace, the government is on track to add at least $10 trillion in the next decade, largely due to the soaring military expenditures.
What does it all mean for the gold market? Well, the worsening of the U.S. fiscal position could support the precious metals, as was the case during the 2000s. The fears about the twin deficits, combined with the commodity bull market, boosted the price of gold then.
When the next crisis hits, the debt-to-GDP ratio will balloon. Given that it is already above 100 percent, and the interest rates are rising, the U.S. creditors could then lose their patience. When this happens, gold should shine – contrary to debt instruments, it bears no counterparty risk.