In a little over two years, between July 13, 1990 and September 4, 1992, the FOMC cut U.S. rates EIGHTEEN times in a row to bring the Fed Funds rate down from 8.25% to 3.00%. Astonishingly, given this orgy by the Fed, George Bush (Sr) was not re-elected in November 1992. Instead, the Presidency went to the Democrats (you should pardon the expression) under Bill Clinton.
George Bush (Sr) presided over the single biggest Federal Government deficit in U.S. history in 1991 - when Treasury debt rose by $US 432 Billion in one year. The MAIN reason for the HUGE series of rate cuts between 1990-92 was the simple fact that debt servicing costs were threatening to become the biggest single item on the Federal budget. At the end of fiscal 1991, Treasury funded debt was $US 3.665 TRILLION.
Now, here we are ten years later, with a month left to go in fiscal 2001. The U.S. government would have us believe that the Treasury no longer runs a deficit at all. Their claim is that the budget has been in "surplus" for the past three years. Funny, the Treasury's funded debts have risen every year of those three years.
But, arguments over surpluses/deficits aside, it is a fact that the imbalance between Federal government spending and tax revenues has been declining for a decade. The amount of debt denominated in U.S. Dollars has not declined, of course, it has exploded. But the generation of that debt has passed from the "public" sector to the PRIVATE sector. In 2000, the Treasury's reported funded debt rose a mere $US 18 Billion - on a budget of almost $US 2 TRILLION.
It is a well-known fact (well, maybe it isn't - BUT IT SHOULD BE) that the only "class" of debtor which can conjure up the means with which to repay out of thin air is a government. "Private" debtors are not allowed to "print" or otherwise manufacture Dollars with which to service or repay debt. Such a privilege is a closely-guarded monopoly of government. That is why corporations and consumers go broke all the time, but governments - if the debt they owe is denominated in their own currency - never do.
Now, we have a potential "sea change" in the steady reduction of government deficit spending which has been a feature of the past decade. In March of this year, the George Bush (Jr) Administration was "projecting" a $US 122 Billion "surplus" for the year ending on September 30, 2001. Now, about four months later, that $US 122 Billion "projection" has vanished. The latest projection is for a "surplus" - OF $US 600 MILLION!
WHA HAPPEN?? It's simple. Tax revenues, specifically CAPITAL GAINS tax revenues, have dried up. Government spending has NOT. The "projected" budget surplus has evaporated, in four months. In this context, it should be stated that the latest figures on the Treasury's debt to the penny site shows funded debt at $US 5.8045 TRILLION as of August 22 - the first time that the figure has been above the $US 5.8 TRILLION level. BTW - the current "debt ceiling" is $US 5.95 TRILLION.
In 1990-92, U.S. rates were cut dramatically to rescue the U.S. government from their crippling debt servicing payments. What happened was that the private sector (consumer and corporate America) went on a decade-long borrowing and spending orgy. Now, despite ANOTHER orgy of Fed rate cuts, Americans are approaching the debt saturation point. The government is facing the stark necessity of plunging back into deficit (according to their own projections) to "rescue" the situation.
Can you imagine a more dangerous scenario for the $US? Can you imagine a more potentially explosive (on the UPSIDE) scenario for Gold? Niether can we. Maybe that is why Gold was DOWN $US 6.80 this week.
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
A "bubble" has nowhere to go but DOWN. An "elbbub" has nowhere to go but UP.
The Fed duly cut rates again this week, and watched in horror as the Dow fell within 174 points of 10000 on the day of the cut, August 21. By the end of the week, the situation was back in hand once more. The Dow rose 180 points on August 24 as data came out to show that Americans were STILL borrowing in July - new house sales rose 4.9%.
On top of that, the $US itself, which had been falling steadily since July 5, stabilised this week. And Gold gave back a little more than half of its $US gains over the two previous weeks.
We are now in the midst of a situation in which the Dollar remains weak, in which U.S. markets remain stubbornly weak, and in which private sector bankruptcies continue to proliferate at record levels.
In the midst of all this, the U.S. still clings to the hope that "growth" is just around the corner. Even though, as the plunge in U.S. government "budget projections" shows, the debt situation is approaching a level of SUPER saturation.
When a solution (a mixture of two chemicals) becomes super saturated, it is unable to combine any further. When that happens, strange events can occur, some of them quite literally explosive. The explosive situation in this instance is one in which the U.S. government will have to once more plunge into greater debt because the consumer and corporate sector is no longer capable of doing it.
It is just a matter of time. In 1991, the budget deficit of $US 432 Billion was 11.8% of the Treasury debt of $US 3,665 Billion. Today, Treasury debt is $US 5,805 Billion and 11.8% of that is $US 685 Billion. No way, you may say, the deficit will NEVER get that high. Well, it was that high (proportionally) ten years ago.
In any credit (debt) based monetary system, if the private sector won't or can't borrow, the government MUST. And they are already - the "budget projections" have gone from a $US 122 Billion surplus to effectively ZERO in four months.
We don't know how many foreigners who hold great mountains of U.S. assets (and U.S. Dollars) know this - but we would bet that many of them do. Suffice it to say that the situation is not getting any less dangerous. Stay tuned.
