What Must Our Creditors Be Thinking?
I read an article recently about problem gambling. You can't help but notice all the poker on television these days. Gambling, lotteries, and all forms of speculation become more popular in inflationary times, as more people have difficulty making ends meet. Problem gambling has been known to strain relationships, interfere with responsibilities at home and work, and lead to financial catastrophe, as more good money is thrown after bad.
Throwing good money after bad is precisely what the folks in Washington D.C. have been doing for years. And just like the addicted father, it is the next generation that pays the price. In many ways politicians are no different than addicted gamblers, and this latest bunch, planning to spend trillions with money they don't have, are the cream of the crop. I was delighted by Barack Obama's election to the office of President, given his statements on foreign policy during the campaign. However spending trillions and adding to the debt mountain, without allowing for the natural forces of an ailing free market economy to heal itself, will be futile.
We have been chronicling the US debt problem for years. An article titled "China Losing Taste for Debt From U.S." in the New York Times this past week suggests that our foreign creditors might finally be figuring things out for themselves. The State of California's Controller John Chiang warning lawmakers the state will be out of money by February without a budget in place, and worthless IOU's sent out to taxpayers instead of income tax refunds, might certainly have opened some eyes overseas as to exactly what their IOU's, also backed by nothing, are worth.
There should be no doubt that any government, present or future, when confronted with a fiscal and/or currency crisis, can and will implement draconian policies. From the types California is contemplating, to excessive profits taxation on certain investments, foreign exchange controls and outright confiscation of assets, governments have been known to do whatever they can to survive.
Of course unlike California or any other state, the US government through the US Federal Reserve has the power to print money. They will do so to bail out the states as well as finance the US government's deficits, by way of the US treasury department. The floodwaters that make up the enormous US market for treasuries will not recede for a long time.
One might say the parabolic growth of that market, and the consequences for the US dollar, is akin to raising a pet tiger in your Manhattan apartment. In the early going life goes on quite normally, although there may eventually arrive a point where things can get dangerously out of hand. One could do a whole lot worse at that point than being able to walk away with just your shirt torn to shreds.
It is why gold bullion did as well as it did in 2008, and why it as well as gold stocks should perform nicely in 2009.