Government Finances and What They are Telling Us
or Why Home Economics Courses Should be Mandatory for Congress.
Government Finances and What it Tells US
One of the numbers we hear all the time in the news is the US National Debt. This number incidentally just crossed the $34trillion dollar mark. The US government has suffered a 55% increase in the last five years. We are now at a ratio of 123% of GDP. This is NOT good.
When I read this yesterday in a post by Anthony Pompliano, I wondered what that means in reference to other countries. So, I Googled the data, and this is what I came up with:
I was quite surprised that among the advanced industrial countries we were not the worst off. However, the USA is number 2. Japan is number one. What does this mean? Looking as a creditor, this number reflects how upside down a country is in their finances and whether they can work their way out of it. Basically, Japan is a lost cause, and the USA is getting worse every year.
The cost of financing debt only gets worse if you don’t tighten your belt and begin to pay off the debt. Essentially the USA has been kicking the can down the road significantly since 1990 and that is how this number continues to get out of control.
Of course, the Federal Reserve is the house. This means that they can directly influence how detrimental this situation will get as we move forward. They can also influence short term economic activity to the benefit or detriment of any current political administration. That being said, it has gotten so big that turning this ship around will not be easy and the USA is too accustomed to a certain level of affluence. Any action to attempt to change course will prohibit political honesty and desire for such actions that will certainly cause discomfort.
Because of the debt issue global currencies face a vote of no-confidence from investors. But we all have to deal with the cards we are given. So, looking at the hand we have been dealt, the situation is dire. There are some market pundits that expect a serious collapse of the economy due to this situation. This makes preparation and a greater level of comprehension necessary.
It is a quite simple truth that the problems will not go away any time soon. This is likely the reason real estate markets are grinding to a halt. People who own property don’t want to let it go. It is a hard asset that protects your capital from depreciation. This can be clearly seen by the new construction in the New York Metropolitan area where new apartments buildings are being constructed everywhere, but with one major catch, they are all rentals.
Most people who can save need options to protect their hard-earned capital. But when your country is spending like drunken sailors with the unlikely scenario that they will tighten the belt and stop the spending then you need to look elsewhere.
This is why equities will always be an option but those that are tied to economic growth will falter. Prices of stocks also rise as an effect of inflation which tells you what your dollar can buy. However, the clearest picture of your currency is the age-old gold market.
Gold is liquid and transparent and not as volatile as other markets that are trying to get into the spotlight. The average gold price in 2004 was $409.72, we have reached as high as $2,075 and are currently trading at $2,046. That means the value of the US dollar has declined 506% since 2003. Have wages increased in the same time period to reflect this change?
Median accountant’s hourly wage in 2003 was $23.54 an hour, today the median minimum wage is about $41.70 an hour. That is about a 77% increase. This means using this overly simple example that the hourly accountant’s purchasing power decreased by 430% doing the same work done twenty years ago using gold as the barometer. Meanwhile, using real estate as the barometer, the median price of a home in 2003 was $168,900 and then 2023 median price was $412,000. That is an increase of 243% meaning your purchasing power decreased by 166%.
Of course, there is no straight line, and these are simple examples. But though crude, these statistics still tell the same story. An individual must take action to protect their capital. Hard assets need to play a significant role since they are the one thing that cannot be easily destroyed or confiscated in a free country. In totalitarian regimes, such as Venezuela or Cuba, where your property can easily be confiscated, people are creative, surviving against all odds and I take my hat off to them. We don’t have as yet the same grave concerns. But we do have a serious “first world” concern which may cause a change of fortunes in the future for people and countries.
Bottomline, things are not looking pretty across the board, and this in essence is the reason gold, silver and yes even Bitcoin have found new takers. I sense that this is only the beginning for at some time as we all know, the birds will come home to roost.
Could the US default on its debt? Not in the foreseeable future, however, if it did, "it would make the global financial crisis look like a tea party", says Simon French, chief economist at investment bank Panmure Gordon, referring to the near collapse of the world's banking industry in 2008.