By Michael Lombardi, MBA for ProfitConfidential
Can it be true?
The U.S. Department of the Treasury has reported that for the federal government’s fiscal 2013 year, which ended on September 30, 2013, the U.S. government budget deficit was $680 billion—the smallest budget deficit in five years. (Source: Bureau of the Fiscal Service, October 30, 2013.)
Let’s face it: a budget deficit at the end of the day means the government spent more money than it received. Where does this extra money that the government spends come from? The answer is simple: it borrows. And as a result, the national debt rises.
Our national debt has increased significantly over the past few years. At the beginning of 2008, the U.S. national debt stood at $9.2 trillion. Today, it stands above $17.0 trillion. (Source: Treasury Direct web site, last accessed October 31, 2013.) This represents an increase of almost 85% in the national debt in the matter of a few years.
I believe the national debt will double from here…from $17.0 trillion to $34.0 trillion.
Why am I so negative on the national debt? I’m skeptical because I don’t believe this year’s numbers present the real story on government spending. Let me explain…
In the fiscal 2013 year, the U.S. government paid interest of $415.7 billion on the national debt. In the fiscal year 2012, the interest payments were $359.2 billion. This means the interest payment on the national debt has increased almost 16%. The more the national debt increases, obviously, the higher the interest rate payments.
But here is the real kicker: interest rates are being artificially kept low. The Federal Reserve is buying government T-bills with the new money it prints. The process is a scam, a Ponzi scheme at best. If the government was paying the interest rate it has historically paid on its debt over the past 30 years, then the annual interest expense on the national debt itself would be over $1.0 trillion!
But that’s not all…
We have cities across the U.S. economy struggling to balance their budget deficit and failing. Cities like Detroit and others in California have already filed for bankruptcy; I expect this trend to continue. And I potentially see the U.S. government jumping in and bailing them out.
Then there is the student debt problem that has surpassed $1.0 trillion. Increasing delinquency rates for student loans, the majority of them backed by the government, are a big risk.
Then there is Obamacare. I have read so many different reports on the “true” cost of Obamacare, I can’t pinpoint a number. But if Obamacare is the stepping stone to socialized healthcare, as some have suggested, the cost to run the program could be well above the estimates I’ve seen. Throw in an aging population that is more dependent on Social Security than ever and more poor people being dependent on government handouts than ever, and we are looking at real budget deficit problems going forward.
If what I’m saying above materializes even a bit, foreign creditors could say “give us our money back,” at which point the Federal Reserve would have to buy all new U.S. debt. The national debt is something to be very worried about.
Michael’s Personal Notes:
The Federal Open Market Committee (FOMC) decided this week to keep quantitative easing and easy monetary policy going. The statement by the Federal Reserve said, “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (Source: Federal Reserve, October 30, 2013.)
I’m one of those economists who believes the longer this goes on, the more troubles we are going to see. Is the Federal Reserve playing with fire?
It’s been almost five years since the Federal Reserve introduced the idea of quantitative easing to the U.S. economy. The goal was to help spur the economy and to help the average Joe, who, at the end of the day, lost his job and his house.
Has that happened?
It’s very clear: quantitative easing and the easy monetary policy that the Federal Reserve has been implementing for some time haven’t really filtered down to the average American. But it is helping the big banks; we have seen their profits grow significantly since 2009, while the average consumer has seen his/her real wages decline. Those who are closing in on retirement are forced to stay longer in their career or rethink their options because their savings have either been depleted or haven’t grown enough.
And we are seeing consumer confidence slide lower. This is the exact opposite of what the quantitative easing was supposed to do. For the week ended October 27, the Bloomberg Consumer Comfort Index declined to the lowest level in more than a year. The index tracking consumer confidence stood at negative 37.6, plunging from negative 29.4 a month ago. (Source: Bloomberg, October 31, 2013.)
Economics 101 suggests that when you have an abundance of money supply, you have inflation. The Federal Reserve has been doing exactly that through the help of quantitative easing and keeping interest rates lower. Take this as an example: in just the last few years, the Federal Reserve has printed more than $3.0 trillion of new money out of thin air, and it continues to print another $85.0 billion a month.
And we are starting to see inflation creep up into the U.S. economy. Mind you, the official numbers don’t show this, but if you ask the person who shops, they will tell you how goods and services are getting more expensive.
With all this, I hear the mainstream talking heads speaking against gold. They say the yellow metal doesn’t hold any value any more and it’s not useful. It may be a hedge against inflation, but we currently don’t have any, say the “official” figures. Unfortunately, the mainstream forgets money continues to be printed by the Federal Reserve and the taper talks have diminished.
The Federal Reserve is playing with fire, hoping it will not get burnt. All of this keeps me bullish on gold bullion and negative on the U.S. dollar.
About the Author - Michael Lombardi, MBA at Profit Confidential, a daily publication for Lombardi Financial customers. (EconMatters author archive Here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
© EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindle