US Budget Deficit: Another Government-Sponsored Ponzi Scheme

Front and center today… Gold has reached a new all-time high this morning. Yesterday I kept watching the shiny metal tick higher and higher, and I would yell out across the desk each rise in gold… Gold was $1,250 when I turned on the screens this morning. It has given back $2 since, as I did some reading and research… But shoot… The move yesterday was something to admire!

Now… Remember how I always tell you that a star shines the brightest right before it burns out… Well… I’ve been reading some research/stories that claim that gold has reached its top level. I’m not buying any of that at this time… Period! But I thought I would tell you that there are some people out there that believe gold is at the top…

They think that because they believe that deflation is the call to order… And while I don’t argue that deflation has settled into our economy right now, I will argue that gold will suffer during deflation. Portfolio theorists have always said that the best asset to hold in a deflationary period is cash… Well, to me, gold is cash… And it doesn’t have to fight for shelf space with investors right now, because deposits of cash aren’t earning interest, (except here at EverBank!) and neither does gold.

OK… Enough on gold… You get the picture…

Risk aversion has set in big time, folks… The risk assets (except gold!) are getting sent down the river without a paddle! The euro (EUR) is in danger of losing the 1.19 handle this morning, and even the higher yielding commodity currencies are losing ground versus the dollar. Stocks are in shambles, and commodities are slipping again…

You would have thought the euro would have gotten some love from a strong factory orders print yesterday in Germany… But no! This morning, Germany printed a strong trade balance report… It wasn’t as strong as forecast, but still… A nice surplus balance of 13.4 billion euros! That puts the trade surplus in Germany for 2009 at 50 billion euros, which rounds out to a nice 10 billion per month! Well, that is, if the data wasn’t two months behind!

Industrial production in Germany also printed strong this morning for April… So… The economic recovery of Germany remains in place, even with all this debt debacle of the Eurozone going on.

Well… I guess the pain is Spain is mostly on the plain, eh? Now Spanish citizens are realizing the budget cuts that the government has proposed are probably going to cut into their way of life… Hey! Suck it up! Germany is going to cut their deficit too, just to show everyone that what’s good for the goose is good for the gander!

This morning, the ECOFIN (Eurozone Finance Ministers) Conference is going on, and there has been some news already from the Conference. Let’s listen in…  But first, I want to remind everyone that three months ago, I offered this solution to some of the problems in the Eurozone, right here in the Pfennig

Finance ministers from across Europe agreed to establish the European Financial Stability Facility to curtail the sovereign-debt crisis that began in Greece. The facility will sell bonds backed by national guarantees, then use proceeds to lend to needy euro-area nations.

Yes, internalize the problems, and forget the IMF!

Last week I spent quite a bit of time talking about the US deficit, and where it was heading… I was reading my friend, David Galland’s, letter yesterday, and he addressed this whole thing in a way that only David could do… So, let me set this up for you… David discusses the forecast that the deficit will reach 100% of GDP in 2012… So, here you go… My friend, David Galland…

“Thus, in order to reverse the steady rise in its debt, the government will need to collect more revenue from the citizenry trapped under its boot heel. Err, I mean, ‘under its warm and protective wing.’

“Ironically, on the order of 65% of all US government debt is owed to the American people. Thus, in order to pay them their modest yields, the government must first lift them out of their pockets.

“It is the very definition of a Ponzi scheme, with the exception that this one is legal.

“Oh, I suppose that if the government actually had even the scintilla of a chance of getting ahead of its debts, it wouldn’t technically be a Ponzi scheme. However, when you add the total future obligations of the government of these United States to the nominal debt, the sum becomes an order of magnitude greater than $14 trillion – $50 trillion? $70 trillion? – so a Ponzi scheme remains the accurate description.”

Oh… I also read an interview yesterday with an economist that claims that the deficits don’t matter, for if they did, buyers of the debt would be demanding higher interest rates/yields… And with yields at historical lows, he believes this is the sign that deficits don’t matter…

I would ask him just what he knows about buying Treasuries through the back door, in order to keep yields low? For that’s what the Fed has been doing for over a year now… Again, I’ll say this any time I hear that deficits don’t matter stuff… It reminds me of a man standing on top of the Empire State building, and decides to jump off, as he passes the 56th floor, he says… “So far, so good”!

And you just wait… Once the Fed does one tiny rate hike, the markets are going to smell blood, and begin to demand higher and higher rates to compensate them… There will be the higher yields this “economist” says are missing from his “deficits don’t matter” thesis.

I read an article yesterday about a rumor that the government would impose a new tax on gold holdings… WOW! I guess they figure they have to raise revenue somehow, and with everyone and their brothers owning gold these days… Well…

Right now this is just a rumor… And one that needs to get silenced before it becomes a whispering campaign!

Then there was this… I read this morning that, in Australia, two iron-ore companies,  BHP and Rio, have notified Japanese steelmakers that iron ore prices for the July-September period will be raised 23% despite the recent slide in commodity prices overall. Brazil’s Iron-ore maker, Vale, is also likely to raise their prices to keep up with the Joneses. This is the second consecutive quarterly hike and will put iron ore at 140% higher than the 2009 contract prices.

That certainly doesn’t look like deflation to me… But it is just one sector…

Chuck Butler
for The Daily Reckoning