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The simple reason why governments never freely decide
on fiscal responsibility is because fixing their well-entrenched problems of over
borrowing and spending means that their already fragile economies would be
temporarily thrown over a cliff.
America faces its own version of austerity come
January. Tax hikes and spending cuts would cut $100's of billions off of the
fiscal 2013 deficit, sending the already-anemic U.S. economy into a
deflationary recession. With nearly $600 billion less debt for the Fed to
monetize, the growth rate of the money supply would contract, which would
send asset prices and most markets tumbling. And we also will bump our heads
once again on the debt ceiling come January as well. If Washington doesn't
agree to raise the debt limit there will be fiscal austerity amounting to
nearly $1 trillion next year! Not to worry though, the U.S. has raised the
debt limit 74 times in less than 50 years. Old habits die hard and there's no
reason to believe D.C. will achieve fiscal sanity this time.
But the truth is that nothing of any substance will be
done in regards to the deficit and debt because if politicians, the MSM and
Wall Street really wanted to cut the amount of red ink they wouldn't be so
alarmed about having the Sequestration go into effect. After all, the Fiscal
Cliff is simply a combination of spending cuts and tax hikes that would
dramatically lessen the rate of debt accumulation; and isn't that what we all
supposedly want anyway? Of course, republicans prefer to raise revenues by
lowering rates and eliminating loopholes; but the key point is they both
still want to increase government's bounty--they just disagree on how to do
it.
There absolutely would not be so much hysteria over the
Fiscal Cliff if both parties actually held the belief that debt and deficits
really matter. Therefore, it seems clear that austerity is something they can
all agree on...only if it isn't happening under their watch. However, data
released this week shows how dire the debt situation really is. The U.S.
budget deficit for October--the first month of the new fiscal year--expanded
by 22%, to $120 billion from a $98.5 billion shortfall in the year ago
period.
And you can forget about a grand bargain getting done
as well. There is no way the Senate and President Obama will agree on a long
term deal to slash entitlements if House republicans can only assent on
cutting tax rates and eliminating a few deductions on "the rich".
They will instead punt on Austerity and all agree on staying drunk in order
to delay the eventual hangover. It is blatantly and egregiously duplicitous
for our government to claim that budgetary deficits and debt must soon be
addressed, yet at the very same time panic about adopting measures that would
address those imbalances now.
Even though austerity is the only real solution for our
proclivity to over borrow and over spend, that scenario is untenable for the
politicians. That is why fiscal austerity will be punted on and we will once
again turn to the Fed to combat the anemic economy with unprecedented central
bank intervention.
My guess is that there will be no significant reduction
in borrowing and spending anywhere in the developed world in 2013. Once the
U.S. officially backs away from the Cliff, commodity prices (especially gold)
will soar. There will even be a huge relief rally in global markets due to
the fact that governments have once again passed on austerity. Unfortunately,
all that will be accomplished is to vastly increase the final collapse of
fiat money and the debt that it supports.
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