WHY THE DEFICITS ULTIMATELY MATTER - ESPECIALLY TO GOLD

There a lot of talk about the ever expanding US - and Global deficit.  Here it's about 20 trillion and counting.

But does it really matter?  Haven't we gotten along fine so far?

AND: Why should we ever have to pay it back, if we owe it to ourselves?

The answer is simpler than you might think.  The answer is that deficit spending borrows growth from the future.

The same way that cocaine borrows energy from the future. It feels great now.  And it works for longer than anyone might expect.  You just need larger and larger doses.

And if you use that growth or energy to  build is a business, or write a symphony, then great, it may just pay that debt back in the long run.  Maybe.

But if you use it to go on a gambling spree in Vegas, or in the derivatives markets, well it will probably all be wasted.

Some of the debt does go to building businesses.  But unfortunately, because in the private sector the vast majority of it is acquired and used by Financial Institutions that are in the gambling business, most of it is used for gambling.

And in the Government most of it is used either to fund wars that build nothing and  return nothing and mostly accomplish nothing, and in paying off massive bureaucracies that exist to fund themselves as well as the drug and insurance companies that are the major beneficiaries of their programs such as medicaire.  

But - does it matter if we/they never have to pay it back?

Yes, it does matter, because all of it dilutes every dollar made in every productive enterprise. It makes everything more expensive for everyone.  Until we get to where we are now.  Where it takes a quarter of a million dollars to send one kid through college.  Where it takes a million dollars to buy a little two bedroom apartment in Brooklyn.

And where it takes six dollars of debt to create one dollar of GDP.

And where no matter how much we borrow, GDP is only positive because we keep changing the metrics wherein inflation is calculated.  Who could doubt if we included Education, Health Care, and Housing in the Inflation figures, that GDP would now be negative, by quite a bit?

What does this mean for Gold?

For all hard assets this means that the value goes up in direct proportion to the dilution of the currency.  Gold is the only hard asset currency.

Right now as the dollar has become the global safe haven gold languishes.  But when it becomes clear the US economy is in the same boat as Europe and Japan, gold will have its day.

Are Ancient coins fairly valued?

Sold for: $55,200.00 includes Buyer's Premium (BP)

This Lincoln penny which is not quite a century old, which looks exactly like the 39,000 other Lincoln pennies minted in 1921, and also looks exactly like the other 50 million or so Lincoln wheat pennies, except for the date, sold recently at a Heritage auction for $55,000.

It is minted in copper so it has almost no intrinsic value.

It has no historical significance to speak of.

It is not very visually imaginative or accomplished.

In fact, is holds no interest even for the person who purchased it except for the number on the holder which says "MS 68."  This same number can be found on countless other holders.  But on this holder with this absolutely pedestrian coin it is worth $55,000 at auction.  Because this number makes it a "condition rarity."

Never mind that it is a condition rarity of something no more unique or significant than an exceptionally well preserved shoe lace or ball point pen.

Not to pick on Lincoln pennies.  The same can be said for Jefferson Nickels, and Morgan dollars, some of which sell for much more than this.

Let's compare this to this Alexander the Great Stater:





Also a condition rarity graded in CH MS STAR.  We have a coin of tremendous historical fascination as it was minted just after the death of Alexander, in about 330 BCE, in order to establish the legitimacy of his half brother Philip III as King of Macedon, and, in fact Emperor of the greatest empire the world has known to that time.  It is also a masterpiece of artistic achievement.  And it is minted on a quarter ounce of gold - about 2300 years ago.

Now, it is impossible to say what the original mintage is, but it is safe to say  no more than 100 examples have come to market in the last 50 years in any condition, and perhaps far less than that.  And the portrait is dissimilar to that on any other coin.

So what is this worth?  Tough to say, exactly, but certainly  less than $55,000 for the Lincoln penny pictured above.  In fact the last coin is similar condition (CH MS without the star) sold for $42,000 in a Heritage Auction.

For the money, which would you rather own?

And this is not an outlier comparison.  Really, the same comparison can be made to many other rare ancient coins of tremendous historical importance with any number of us condition rarities of nickels, quarters, dollars that are less than 100 years old - from mintages in the 10's and 100's of thousands.

Again, over time, which would you rather own?

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US DOLLAR INDEX

Here's a chart of the US dollar index since the 70's
    You can see above where Volker broke the back of inflation.  Since then every US president , starting with Reagan took advantage of the strong dollar, and low inflation to borrow from future growth through A) Massive Deficit Spending and B) Permanently negative real rates.  Japan followed suit, even more aggressively and they were lauded as economic magicians until they sank into a permanent recession.  Europe followed suit right after the creation of the Euro.  Now they're in a permanent recession.  And so are we!

Not that anyone will admit it.  Yet.

So what next?  Well, we win the ugly contest.  Our rates (of growth and interest)  though negative in terms of real inflation are still way more attractive than rates in Europe and Japan.  So Capital is flowing here.  And that is accelerating.

So the Dollar index must go higher.  And higher.  How high?  Well, maybe as high as in the Volker era.

But then what?  After borrowing growth from the future for 40 + years, that game has been burnt out.

We just aren't going to grow our way out of it.

So then what?

What happens after all that capital has come here, and we fall into an endless recession?

What then, Mr Wizard?

Nobody knows, but it will be good to own some things with intrinsic value.