A Look at the Long-Term Trends in Government Spending

Stocks are up a tad as of this writing. They were up quite a bit more than a tad earlier today but, as happened in yesterday’s session, confidence waned around lunch, sending them lower in the afternoon. All in, the major US indexes are off by about 3% and change for the month…and down a little over 4% on the year.

Gold, too, is having a tough time of it of late. An ounce of the precious metal “languishes” just above $1,616 per ounce after having traded up over $1,900 just a month ago.

What gives?

If you believe the papers, markets fall because of “uncertainty surrounding the Eurozone debt crisis…” or “an unexpected rise in jobless claims…” or “some other unexpected economic phenomenon that threw experts for a loop.” Conversely, if we are to believe the mainstream media, markets rally due to “renewed confidence in the Eurozone…” or “a hunky dory jobs report…” or “because something finally fell in line with what a panel of experts had predicted.”

None of this is true, of course. At least not on purpose. Call it reactive reporting…sometimes known as “deductive fallacies”…other times known as “meeting a deadline.”

Get a journalist under the pump and he’ll say just about anything to ensure he’s out of the office by cocktail hour. Anything, that is, except “I don’t know.” People don’t want to read “I-don’t-knows.” They want answers…even if they are incorrect, poorly thought out and bear the martini-stained scars from a long lunch meeting.

But sometimes it’s worth admitting a little ignorance, a little doubt and uncertainty. At the very least, it lends a bit more credibility to the times you do know something (or at least when you think/suspect that you do).

We suspect (there’s that word again) that, when it comes to stock market prognostications, the shorter the time frame of events, the less likely we are of having any real knowledge about anything. That may be true for many things…but it’s especially true of the markets. Ask us what’s happening today. We’ll tell you we have no clue. Tomorrow? Nope. Still out of luck. How about a year from now, or longer? Ahh…now we’re getting somewhere.

That’s because larger trends take time to work themselves through the pipes. Take gold, for example. In the very near term — like tomorrow — anything could happen. Volatility over the past few weeks has certainly testified to that. $60 up one day. An $80 drop the next. Generally, however, the recent trend has been down. People are heading into the “safety” of cash and bonds. But that, in itself, is still a reasonably short-term trend. Gold may yet go down to $1,400 per ounce. Or $1,200. Maybe lower. But stretch that trend out a bit further and see what you get. Gold is down about 15% over the past month…but it’s up more than 500% during the past decade. Smooth the trend line out a bit. Take out the bumps. What does it tell you?

Cash and bonds might be a “safe” place to be right now…but where will they be in another five years? Or in ten?

Government issued money — be it in cash or bonds — represents a promise to pay. Nothing more. The key, it must be noted, is not only the ability to pay, but, more importantly, the perceived ability to pay. It’s a confidence game, in other words.

Is the US government going to cut spending during the next five to ten years? We doubt it. There might be talk about it along the way (impacting shorter term trends) but, long-term, the fix is in. A report carried in today’s Washington Times, making the point for us, notes how budget cuts would “hollow out [the] military.” An addiction to the military is part and parcel of being an Empire. It doesn’t go away until it shoots itself in the face. Even Nobel Peace Prize-winning presidents are seen to expand the size and scope of the warfare state. Why? Because they have no choice. Too many vested interests. Too many greasy handshakes. Too many kickbacks and too many entrenched lobbyists.

But what about the other component of Empire, the welfare state? Here too we see no choice but for the beast to grow. In fact, it must grow. That’s the long-term trend of a welfare state. And it’s a trend protected by democracy itself. Once the majority become net recipients, as is the case in the US, they vote themselves ever-fatter slices of other people’s pies. The welfare state grows and grows until it ends up feasting on its own tail. Today, some 46 million Americans eat at the government’s table thanks to food stamp programs. Another 60 million or so cash Social Security checks…with 10,000 more baby boomers set to retire every day for the next decade. The warfare/welfare state gorges on itself from one end…and shoots at itself from the other. Eventually, even the perceived ability to keep this charade going collapses. And with it goes the paper dollar promises used to pay for it all.

Joel Bowman
for The Daily Reckoning