The Sound That Washington Made

Clang-clang! Clankety-clank! Clang-clang!

Do you hear that sound, dear reader?

Hmmm…if we are not mistaken, that’s the sound of someone kicking a can down the road.

Oh wait…no…that’s the sound of Congressmen kicking a can down the steps of the Capitol building, out into the streets of American taxpayers…present and future.

As we finish up today’s edition of the Daily Reckoning, an “historic vote” is underway in Washington D.C. We do not yet know the results of the vote, but we already know the outcome: more of the same.

The newswires are abuzz with headlines of a breakthrough budget deal between Republicans and Democrats.  Most of the headlines portray the deal as something epochal, extraordinary… even revolutionary. But the deal on the table is nothing but ordinary, par-for-the-course, more-of-the-same, political cosmetology.

This “groundbreaking” agreement between the two leading political parties promises to “cut” $2 trillion in spending over the next 10 years.  That sounds like a lot of money.  But there are at least two big problems with the math.

First, a cut in spending, as Washington defines it, is rarely a reduction in current spending. It is usually a reduction in planned future spending increases. If you or I cut spending the way Washington cuts spending, for example, we would not save $10,000 per year by canceling our golf club membership, we would “save” $10,000 by not joining the tennis club we were planning to join next year.

Returning to the real world for a moment, even if the $2 trillion of planned savings were savings as most of us would define it, the number is still much too small to make any difference. A $2 trillion spending cut – over 10 years, mind you – is a rounding error in the context of America’s $75 trillion – roughly – of total outstanding debts and future liabilities.

In the first two fiscal years of the Obama administration, alone, the United States amassed fresh debts of $2.7 trillion…which leads us to the Daily Reckoning question of the day:

If the government can effortlessly incur $2.7 trillion of fresh debts in just two years, why does it need a decade to cut spending by $2.1 trillion?

Answer: Clang-clang! Clankety-clank! Clang-clang!

Nevertheless, the announcement of the budget deal is likely to produce a knee-jerk bounce in the dollar and in equity markets around the globe… for a while.  Precious metals, on the other hand, are likely to slip for a bit. But these moves – stocks up, gold down – would be counter-trend blips, signifying nothing except investor hyperactivity.

The underlying fundamental trends in United States do not inspire confidence.  In fact, raising the debt ceiling in exchange for meager spending cuts over what might as well be an eternal timeframe does not improve America’s credit-worthiness one iota; it merely allows her to become even more insolvent.

Imagine your uncle came to you, asking to borrow some money. Your uncle earns about $100,000 per year, but he already has half a million dollars of outstanding unsecured debt. He promises to reduce his half-million dollar debt load by $14,000 over the next ten years, if you will merely lend him $7,000 today.

Would you lend your uncle the money?

Probably not…unless your uncle’s name was Sam and you had no choice in the matter.

Buy gold…still.


Eric Fry,
for The Daily Reckoning