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September
07
2023

The U.S. Fiscal Situation Deteriorates
Craig Hemke

The price of gold and silver can be influenced by a variety of factors, including economic conditions, investor sentiment, and geopolitical events. The U.S. fiscal situation and the possibility of a debt crisis can play a role in affecting the prices of these precious metals, although the relationship is not always straightforward.

The U.S. Deficit and Its Influence on Gold and Silver Price

When even The Washington Post is forced to point out how bad it is, then you know that it's pretty bad.

It was a long holiday weekend in the U.S. and, as such, some of the news and headlines may have slipped past without garnering much attention. This is always particularly true of economic headlines, as the mainstream media rarely takes time to highlight issues that may be damaging to The Financial-Political Complex.

However, Sunday, September 3, brought this item from the veritable Washington Post. You likely missed it, so you might want to take a second to look it over: U.S. deficit explodes even as economy grows.

Of course, we've discussed these issues for years. As recently as late July, we tried to warn again about the eventuality of The End of the Great Keynesian Experiment.

What is "The End of the Great Keynesian Experiment"? In short, it's the mathematical certainty of exponentially growing debt levels that can no longer be serviced through economic growth alone. At some point, only new debt and currency issuance can feed the beast fast enough to keep it alive. This is what The Washington Post was driving at with their holiday weekend column, and here are a few of the charts they used.

First, check this bar chart of the most recent annual U.S. budget deficits. As you can see, after reaching $1,000,000,000,000 in 2019, the deficit exploded with the COVID lockdowns, as spending soared and tax revenue plummeted.

Gold Has an Inverse Relationship With Interest Rates

Look further at that chart and be sure to note that, even with a "recovering" and "strong" economy in 2022, the total deficit remained near $1,000,000,000,000. And now, in fiscal year 2023, which ends on September 30, it's projected to be almost $2,000,000,000,000. What's the deal?

Well, first of all, monetary policy from the Fed has jacked interest rates to the highest they've been in nearly two decades. As the U.S. attempts to service the accumulated debt of over $33,000,000,000,000, it's being forced to pay nearly double the interest cost that it saw just a few years ago.

Soaring Expenditures Cause Concerns About Economic Stability

Rising interest costs are not the only issue. Total government expenditures continue to soar across the board. The politicians in Washington will always tout "budget cuts" when, in fact, all they ever accomplish is a slowdown of spending growth and NOT spending CUTS. See: Baseline Budgeting.

An even larger issue is that the only "income" the government receives comes via taxes and fees. For this "income" to grow, the overall economy needs to be growing, too. As the U.S. barrels toward the inevitable recession of 2024 and beyond, total government revenue will shrink as the economy contracts. The resulting gap between income and outlays will only serve to widen the total budget deficit. This, in turn, will grow the percentage of deficit to GDP. 

What happens next? The current total debt will grow from the current $33,000,000,000,000 to more than $35,000,000,000,000 and, as spending continues in a weak economy, $38,000,000,000,000 in 2025, and over $40,000,000,000,000 soon thereafter. 

Managing these deficits and debt will require a lot of new cash – from where will it come? Private investors? Hardly. Foreign governments? Most of those are currently net sellers of U.S. treasuries. The big banks? OK, but from where will they get the funds? And there you have it! The ONLY solution is continued currency creation by the Fed.

The Accelerating Debasement of Fiat and the Outcome for Gold and Silver

Currency debasement has been the ultimate tool of debt management for millennia and it will continue to be utilized for this crisis, too. The roots of this technique can be traced all the way back to the reign of Dionysius I of Syracuse, the ruthless Greek tyrant who reigned about 400 years B.C.E. 

"Repay" your debts through currency issuance has been the standard playbook ever since. The Roman Empire famously chose this outcome, as did the Weimar Germans. The U.S. and the other debtor nations of the West will soon be forced down the same path.

As a result, your only protection against this madness has always been... and will always be... the accumulation of physical precious metal. Gold and silver cannot be debased or printed into existence, thus they have always returned as "sound money" whenever the currency devaluation plans of regimes and tyrants have inevitably run their course. 

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

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