Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
As the U.S. Senate moves closer to passing a trillion-dollar spending bill that includes some infrastructure priorities, critics are warning that the public is being taken for a ride.
President Joe Biden and his allies in Congress have actually claimed that the new spending won’t add to the national debt or increase pressures on inflation. Treasury Secretary Janet Yellen pitched the package as an investment in the economy.
It’s certainly true that much of the nation’s infrastructure is badly in need of upgrades. Roads, bridges, pipes, and airports across the country are in poor shape.
But the proposed spending includes lots of things that have nothing to do with actual, physical infrastructure improvements. The Wall Street Journal slammed it as a step toward a Green New Deal.
And it’s not all paid for through budgetary gimmicks, either. The nonpartisan Congressional Budget Office reported on Thursday that the infrastructure bill in its current form would increase federal budget deficits by $256 billion over 10 years.
So as with other forms of government spending, it will be paid for by creating new debt and inflating the currency supply.
Republican Senator Mike Lee of Utah blasted the bill’s fake “pay for” provisions and predicted higher inflation rates ahead.
Sen. Mike Lee: And there are lots of good things in this bill that will help a lot of good people, that are well-deserving. Sometimes when you get so wrapped up in that, it's easy to lose sight of the fact that the pay-fors are fake. But if we weren't going to provide real pay-fors, then we should have just seen from them an admission from the outset. We're not going to pay for it. And instead they said, "It's going to be paid for." And then they released it and said, "It is paid for," only there are some asterisks next to that, some footnotes that reveal that according to a lot of research that's been done on it, as much as half of the pay-fors are just fake. Rising deficits and the mounting debt that we've accumulated is not just a future problem, it's a present problem. We're seeing inflation, the likes of which we haven't seen in decades. And I strongly predict, by the time the latest inflation numbers come out just a week or two from now, we're going to see that it's even worse.
Inflation this year has been much higher than the Biden administration and the Federal Reserve had predicted. But in recent weeks a massive disconnect has emerged in the bond market, where yields are falling rather than rising.
The 10-year Treasury yield dipped below 1.2% this week. Perhaps bond buyers are convinced that inflation pressures are transitory and that consumer prices will barely budge over the next decade.
Or perhaps the bond market is reflecting some other reality. Expectations that the Fed will continue to be the largest buyer of Treasuries may be overriding any concerns about inflation and negative real yields.
A surprising lack of inflation fear is also being reflected in the precious metals markets – at least in this summer’s trading.
Gold prices have been trading close to the $1,800 level over the past month. They need to climb above $1,840 an ounce to get some upside momentum going.
The metals complex is taking it on the chin unfortunately today. As of this Friday morning recording, gold trades at $1,769 an ounce and is down 2.8% since last Friday’s close. The silver market shows a weekly loss of 4.7% to bring spot prices to $24.36 per ounce. Platinum is off 6.4% this week to come in at $994. And finally, palladium is putting in a slight weekly loss of 0.7% to trade at $2,672 per ounce.
Precious metals investors will need to keep a long-term perspective through these choppy market conditions. Markets are inherently unpredictable from day to day. But if the goal in acquiring physical bullion is to beat inflation and maintain or grow purchasing power over time, then there are trillions of reasons to keep accumulating.
The government officially owes $28.6 trillion on the heels of a record $3.4 trillion budget deficit.
Treasury Secretary Yellen announced Wednesday she would be pursuing emergency measures to raise $126 billion and avoid breaching the Congressionally imposed debt ceiling.
The Treasury’s accounting maneuvers will, for now, avert a disastrous debt default. And, like so many times before, Congress will eventually raise the debt ceiling to enable more Biden administration borrowing
To expect politicians to ever impose meaningful fiscal discipline on themselves is to ignore all recent history. Regardless of whether Democrats or Republicans happen to be in charge at any given time, the spending never stops and the debt always expands.
That doesn’t mean Washington can continue running up red ink in perpetuity without serious consequences. The ultimate consequence may be a currency crisis as the Fed’s own ongoing extraordinary measures of buying up government bonds trigger a slide in confidence in the U.S. dollar itself.
Since Federal Reserve Notes are no longer backed by gold or silver or anything tangible, maintaining their value is literally a confidence game. Of course, having the world’s largest economy and military with global trade conducted mostly in dollars, combined with the IRS’s power to tax in dollars, goes a long way toward bolstering confidence that lots of people will continue to need dollars.
Thanks to its privileged position on the world stage, the U.S. has been able to forestall a currency crisis for longer than many sound money advocates would have thought possible. But as the country’s debt rises faster than its GDP and interest rates remain artificially depressed below the inflation rate, the value of the currency has nowhere to go but down.
No emergency accounting gimmicks by bureaucrats or fake “pay fors” by politicians will be able to bail the system out from what’s coming. All they can do is try to keep kicking the can down the road. But the end of the road may be approaching.
Investors need to be prepared for what happens next.
A sharp rise in inflation has already occurred over the past year as a result of expansionary fiscal and monetary policies. While Fed Chairman Jerome Powell assures the recent inflation spike is just “transitory,” the government’s borrowing binge is more aptly described as intractable.
There is no political will to stop the deficit spending or pay down the national debt. And there is no way for officials to maintain their growing debt load other than by inflating the currency supply.
The only question is whether they will be successful in engineering a gradual, orderly decline in the value of the dollar…or whether they will one day lose control as the currency collapses.
In either scenario, gold and silver markets can be expected to perform relatively well. But in the event that the dollar’s decline becomes disorderly, precious metals may be the only asset class that holds up well.
Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a weekend everybody.
About the Author:
Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.