Budget Cuts in the Irrational Financial System

Gold down another $5 on Friday. Are you tempted to get out of gold now…and get back in, after the dip bottoms out?

Forget it.

The advantage of investing family money rather than personal money is that you have time on your side. You can sit tight and let the big trends make you big money… If you can get them right.

But don’t try to trade in and out. Because you can’t know exactly when the trend will back off…and when it will explode to the upside.

So if you want to take advantage of a big trend, you have to just get in and stay in…and take a very long-term approach. In the case of the gold bull market, for example, it may be years before the final blow-off bonanza comes.

If you try to time the trend on a year-by-year basis, you’re almost sure to lose money…and miss the big payday. Because you’ll sell out…then, the price will rise. You’ll vow to get back in on the next dip. But a real bull market never gives you the dip you’re looking for. Prices go down…you hesitate, hoping to get in at the bottom of the move…and then, they rise again. Soon, the price is much higher than the price at which you sold out. So, you want to kick yourself. “I can’t buy back in at such a high price,” you say. You wait…and the bull market goes ahead without you.

That’s why speculators rarely make any real money in a major bull market. The fellow who makes the real money is the guy who buys in early…and stays in to the end. Imagine trying to trade in and out of stocks during the big bull market of ’82-’00, for example. Most likely, you would have sold out somewhere along the way…and been left behind…while those who just stayed in multiplied their money 11 times.

So, don’t be tempted to sell out. Buy. Hold. Be happy.

And be prepared to wait…years if necessary…for the crack-up of the monetary system and gold at $3,000 an ounce – or more.

It seems like a sure thing. But, wait…what’s this?

Here’s the latest from US News & World Report:

Moving aggressively to make good on election promises to slash the federal budget, the House GOP today unveiled an eye-popping plan to eliminate $2.5 trillion in spending over the next 10 years. Gone would be Amtrak subsidies, fat checks to the Legal Services Corporation and National Endowment for the Arts, and some $900 million to run President Obama’s healthcare reform program.

What’s more, the “Spending Reduction Act of 2011” proposed by members of the conservative Republican Study Committee, chaired by Ohio Rep. Jim Jordan, would reduce current spending for non-defense, non-homeland security and non-veterans programs to 2008 levels, eliminate federal control of Fannie Mae and Freddie Mac, cut the federal workforce by 15 percent through attrition, and cut some $80 billion by blocking implementation of Obamacare.

How do you like those Republicans! They’re trying to spoil our fun. Finally, they’re going to “pull a Volcker.” Tough guys, huh? They’re tough on spending. See… Francis Fukayama was wrong; they do have an appetite for fixing America’s real problems after all. There goes the bull market in gold! The yellow metal will probably fall in price for the next 20 years…just as it did after Paul Volcker got control of inflation in 1979.

But wait… $2.5 trillion sounds like a lot of money. But it’s over 10 years. That’s only $250 billion a year. And the budget deficit this year is supposed to be over $1 trillion.

So, unless we’re missing something…even these cuts are only a quarter of what they’d have to be in order to bring the budget back into balance.

Okay…you’re thinking…what’s a little deficit? But at $750,000 billion…that’s still a deficit of 5% of GDP, even if the cuts were 100% effective. And if the economy grows at only 3% or 4% of GDP…as Ben Bernanke has forecast…it means debt as a percentage of GDP is still growing.

So even these modest cuts proposed by the Republicans don’t have a chance. Every privileged group threatened by the cuts will mobilize. The wailing and gnashing of teeth will be reported from coast to coast. Compromises will be made. In the end, spending will probably go up – even for the programs that were supposed to be cut.

So, why bother to propose cuts that will be blasted as “drastic” and “draconian”…if they 1) won’t be passed…and 2) aren’t even a shadow of enough to get the job done anyway?

Why? Because that’s how the system works. It awards special benefits to power groups, whether the nation has the money to pay for them or not. Then, if there is a problem…it pretends to fix it.

And we know what you’re thinking… “Well, the system will just have to learn to do things differently.” But that imagines that the “system” is rational, thinking and responsive. It is not. It is merely reactive…like a primitive molecule or a PTA meeting. It has DNA. It desires to procreate. It will fight to protect itself and stay alive. But it cannot become a different thing. Look, tigers may be on the verge of extinction. But you don’t see them becoming house cats, do you?

That’s just not the way it works. The system must fight to protect itself. Not something else. It can’t become a different system. If it were to do so it would no longer be the system, would it? It will react to the bond market…to default…to revolution. It will not respond to the needs of fiscal integrity.

Got that? Hope so. That’s the final piece of our new idea about how the world works.

The Providential State…our advanced social welfare governments…were set up in a different time. They evolved under very different circumstances. The climate has changed. Where once there was abundant land, water and energy…now there are 6 billion people bidding for the same limited resources. Where once there was a handful of Western nations (and Japan) with a disproportionate share of the world’s wealth…now they are having to share the wealth with Brazilians, Chinese, Indians and others. Where once their populations got richer every year, now their wealth stagnates and falls. Where once there were more of them in every generation, now there are fewer workers to support the old people. Where once old people cooperated by dying soon after they stopped working, now they refuse to die at all.

And yet, the government cannot adjust to these new realities. The new realities are against its nature. It was designed to keep both the masses and the elites happy. The elites were paid off with big bribes. The masses got small ones. What will happen when the bribes stop?

That is what we will find out.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning