Silver and Gold: Faith, Confidence, and Sound Money

A recent study about high, long-term government budget deficits published by the Washington Post indicates that such situations can be statistically linked to significantly lower future growth levels. The National Bureau of Economic Research looked at 26 past examples of when the level of government was running over 90 percent for a five year period or longer. The study discovered that growth observed during such high debt overhang periods was an average of 1.2 percent lower than normal. In addition, the impact of these periods stretched out over an average of 23 years. In essence, the researchetkaetrs found that high deficits correlate with dwindling GDP. While it should not have taken a formal study to figure that relationship out, one has to wonder if statistical correlation is the same as causality. Other Problems With Overspending Reduced future growth is one consequence of a country’s government running extended high budgetary deficits. Another effect is that more time is available for the misallocation of capital. Furthermore, the higher the interest rate burden gets, the less stable the country’s finances become, and so sovereign debt defaults increase in likelihood. A government that is already overspending is also more likely to keep on spending more than it receives. This institutionalizes over spending and feeds a growing government bureaucracy. rnGovernments spending in excess of their income also often become more dependent and accepting of at least some inflation. Inflation can help them reduce the impact of ever increasing debt servicing requirements. rnNevertheless, more inflation means a loss of purchasing power for the common person. This just punishes savers and keeps productive capital away. rnMost governments and their central banks have established a sense of trust that if inflation were ever to get out of control, then they could step in to control it, but is this realistic? Confidence is Waning rnThe problem is that you have a huge swath of the U.S. population — baby boomers, retirees and pensioners — that want so desperately for values of the considerable amount of assets that they own to rise. The dominating size of this group has made it seem as though they can pull the punchbowl away in time. This might sound reasonable enough since if you can create something, then you can probably take it away. Nevertheless, the long term effect is that the impact of successive easing measures diminishes, and a general lack of confidence starts to creep in that ultimately stifles growth for extended periods. Confidence levels remain low, and it seems hope is fading for the economic recovery that everyone was hoping for. While confidence and faith can change like the wind, the retail investor is mostly gone from stocks. Investors are steadily shifting funds to hard currencies like silver and gold that tend to hold their value in trying times. The narrative is slowly turning to reflection, and this paves the way to enlightenment, especially when it comes to debt monetization and those who are charged with making key spending and monetary policy decisions.