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Most people, provided they have a
minimum of experience, know that taking a bone from a dog is a risky
proposition. In terms of political power, few dogs are bigger than the
American voting public. Taking away, or even
threatening to take away, the major entitlements to which they have become
accustomed could expose politicians to a mauling at election time. As the
American leadership begins to grapple with very large issues of entitlement
reform in "sacred" programs such as Medicare and Social Security,
many may recoil from the task once the fangs begin flashing.
According to polls, 77% of Americans
feel the U.S. Government must cut spending. But when it comes to specifics,
the support melts away very fast. Until recently, the strongly Republican
26th District of upstate New York had elected only three Democrats since the
Civil War. But in a special election held this month (to replace the resigned
Republican Chris Lee) the district fell to the Democratic column for the
fourth time in 150 years. Many have theorized that the political upset was
based on fears that the budget plan put forward by House Budget Committee
Chairman Paul Ryan would restrict entitlements, particularly Medicare.
If there is any truth to this, it shows
how difficult the process may be for politicians who want to seriously trim
the Federal budget. But any glance at the enormity of the problem should
provide the necessary courage. This assumes, of course, that there is any
courage at all left in Washington.
Currently the U.S. Treasury has public
debts of some $14.3 trillion and is pleading, and in fact coercing, Congress
for a debt limit increase. But given are already abysmal situation,
additional debts should not be considered.
According to the U.S. National Debt
Clock, unfunded obligations such as Social Security and Medicare etc., total
some $114 trillion -- or more than eight times the size of the annual Gross
Domestic Product of the entire nation. Divide this figure by the number of
households, approximately 115 million, and you come to the startling
realization that each American household is liable for nearly $1 million. Add
in another $54.9 trillion, which is the total debt held by all levels of
government in addition to all business and household debt, and you begin to
get an idea of why the future looks bleak.
To finance their spending, governments
traditionally levy taxation and incur debts. But excessive taxation carries
electoral risks. On the other hand, excessive debt risks a severe, even
ruinous flight from government debt securities and skyrocketing interest
rates. This is exactly what Greece is now beginning to suffer, despite
massive compulsory support from the EU, ECB and the IMF.
But there is a third, decidedly
stealthier method that governments are tempted to use. In the past, it was to
dilute the gold or silver content of their coins. But with the advent of
paper currencies, debasement merely requires printing. All that's required
today is a stroke of a computer key.
Because the U.S. dollar is the
international reserve currency, the Fed has been able to camouflage its
debasement for decades. Given that many nations are obliged to buy dollars to
manage their currency valuations, excess liquidity in the U.S. flows quickly
offshore where it's pernicious effects fall on other nations. Recent news
from China, where the government is struggling to contain inflation while
civil unrest flares, confirms this hypothesis. Too much more of this and the
dollar's reserve status will be placed in greater jeopardy.
Clearly something has to be done to cut
government spending or America's debt crisis will result in a sudden collapse
of the once mighty U.S. dollar. The key question, though, is how to persuade
politicians to take the necessary actions when doing so could spell electoral
defeat?
The answer is patriotism and an informed
population. Only if politicians begin once more to put their country before
their party and political careers will it be
possible to avert a catastrophic currency collapse. This process must begin
with a candid acknowledgement of the facts. America is in dire economic
straits and increased hardship in the short-term is both necessary, and
ultimately unavoidable, if we are to get back on the path to prosperity. Like
Churchill in May of 1940, politicians need to deliver the ugly truth and
prepare voters for the inevitable pain.
Only by enacting massive reforms of
major entitlements, which includes cuts to Social Security and Medicaid
benefits, and reductions in military and domestic spending, will America be
enabled once more to balance its books, generate real wealth, and issue sound
currency.
But given all that we know of how
politics works in America, how many elected officials will grab the bone from
the dog's mouth and pull? Regrettably, I can't assume many are up for the
challenge. As a result, we must assume the worst for the U.S. dollar.
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax:
949-863-7100
www.europac.net
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