Shifting World Financial Currents: Domestic Economic Uncertainty

Domestic Economic Uncertainty

An unfortunate thing about our society today is that our children and individuals under about age thirty-five are taught so little about history and finance that they know almost nothing about the gold standard, and how it has played a key role in monetary history.  They are showered with informercials that elevate gold to some lofty status by hucksters that are little better than the crypto crowd.   On the other end of the argument is the Wall Street crowd that sees gold as valueless because of its slow progression and lack of income stream.

Like most financial resources, gold as an asset in the United States does have a place in portfolios in times of economic strength and times of uncertainty.  The issues in favor of fiscal restraint and gold as an asset are:

Domestic economic uncertainties

Global economic uncertainties

Central bank strategies

Domestic Economic Uncertainty

Economic uncertainty comes in many different flavors, and some or all can be present at any point in time.  Civil unrest, global conflicts, trade wars, political corruption, weather or geological events, and other factors all play into economic uncertainty.  With almost instantaneous worldwide communication nothing is hidden from scrutiny.  The issue is not dissemination of information, but analysis.  In our experience global economic uncertainty is almost always brought on by the political reaction to world events, and rarely the events themselves.

Clear examples of these poorly thought-out responses are all around us.  The responses from politicians (even if well meaning) usually address immediate or short term needs with little regard for longer term consequences.  It is this short-term focus that has placed most countries in financial peril.  Imagine if our politicians said “We need to support the Ukrainian people in their struggle against Russia, but this will cost nearly $100 billion.  To meet this need, we must collect an added $330 in taxes from every U. S. citizen regardless of your income level.”  This same issue applies to natural disasters, wars, welfare, and other social programs.  Our Founding Fathers never intended for us to be a major debtor nation and warned about the problems that arise from entrenched bureaucracies.  Please do not misunderstand my intention, I am not for more taxes, but more taxes restricted to specific uses and debt reduction may be the only way out of the current mess.

Our national politicians have discovered that they can mask this issue with deficit financing, so the difficult financial and political decisions are never debated in Congress nor brought to citizens for vote.  Finance outside one’s next credit card bill may be beyond the understanding of many citizens, and the Washington politicians know it and take advantage of it.  Most citizens lack the savings to meet their longer-term needs, and we now tax less than half of the population, so fewer and fewer have any “skin in the game.”

But world finance is also beyond the understanding of most politicians, and the savvy bureaucrats know it.  The issue is not one that is unique to the United States, but analyzing our own situation is easier so we will use it here for discussion.  The long-term consequences of meeting every need from the Federal level with no corresponding taxation is obvious.  It has never been more obvious than with the events of the past twenty-three years.  As our politicians meet crisis after crisis with more deficit spending, they are digging a hole from which there may be no return.  The socialists among them know it and are happy to go along, promoting larger and larger deficits.

In the past twenty-three years we have been hit with a significant number of challenges, all met with deficit spending.  These practices allow politicians to appear to meet our short-term needs while avoiding discussions concerning how we need to fund these events.  Year-by-year just a few of these significant issues include:

  • 2023 – War in Ukraine support, energy needs in Europe
  • 2022 – Inflation Reduction Act, student loan forgiveness, Quantitative Tightening
  • 2021 – COVID-19, American Rescue Plan Act, Recession, Russian Embargo., Exit Afghanistan
  • 2020 – COVID-19 and 2020 recession
  • 2019 – Trade Wars with China
  • 2018 – Trump Tax Cuts
  • 2017 – Congress raised the debt ceiling to avoid the difficult decisions on spending
  • 2016 – Brexit uncertainty in Europe and Great Brittan
  • 2015 – Oil prices fell from oversupply
  • 2014 – Quantitative Easing ended, debt ceiling crisis
  • 2013 – Sequester, government shutdown produces a false reduction in spending
  • 2012 – Fiscal cliff deal pushes more issues “down the road”
  • 2011 – Debt crisis, recession, and tax cuts reduced needed revenues
  • 2010 – Recovery Act added $400B, Obama Tax Cuts, Obamacare, Simpson-Bowles
  • 2009 – Banking bailout cost $250B, Recovery Act adding $242B more
  • 2008 – Banking bailout and Quantitative Easing
  • 2007 – Banking Crisis with some bank failures
  • 2006 – Bernanke chairs the FED and introduces the concept of Quantitative Easing
  • 2005 – Bankruptcy Act and Hurricane Katrina
  • 2004 – Iraq War
  • 2003 – Iraq War
  • 2002 – War on Terror
  • 2001 – 9/11 Attack

This is a wide-ranging list of issues from terror to natural disasters, to banking mismanagement, to social programs, to pandemics, to geopolitical tensions.   But there are two common denominators, ineffectual political responses, and massive deficit spending.  At times politicians have tried to address genuine problems, but they are often doing little more than appease voters and special interest groups.

Politicians know if they take solutions to the voters, they lose power and influence, and often will receive different outcomes than they want.  Asked if they would like to go after the 9/11 attackers specifically or go into the Middle East with a protracted war that would last decades, cost lives, and produce billions in debt, voters would probably vote to go after the perpetrators specifically.  Asked if they favor unchecked spending for Covid relief, voters will probably vote for some relief for those in need, but not for blanketed checks to every citizen regardless of need.

The easy answer to these questions is when we see our politicians go into hyper-activity mode regarding spending with no discussion about alternatives nor how it will be paid for, then we are at an inflection point on future economic uncertainty.  When this becomes a “theme” for politicians worldwide, then we are at a point of financial cliff hanging.  In every case over the past twenty years elected officials (worldwide) have made the wrong financial decisions to appease the loudest voices and remain in power.  They have fostered an environment of dependency and not self-sufficiency.  Much of this is done to protect and foster an ever-growing bureaucracy, not just in America, but worldwide.  In the United States our politicians have allowed our enemies to grow stronger, while weakening our position and stature through disastrous economic policies.

This article and series were completed with the collaboration of freeman.

Research Source Materials

Saint Louis Federal Reserve Economic Data (FRED Database), stlouisfed.org, Various Dates, tables, and Charts.

World Gold Council 2022 Year End Report, http://www.gold.org, December 31, 2022.

Various Sources of broadly disseminated Market data and Central Bank data..

Three Part Series

This article is the first of a three part series on economic stability and the usefulness of gold in this environment.  The full series can be seen here.

DISCLOSURE: This commentary is being communicated as general information and observations only and should not be taken as investment advice.  It is not investment research or a research recommendation, as it does not constitute material research or analysis.  The actions that you take as a result of information contained in this document are ultimately your responsibility.