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Wednesday, December 19th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

CBO Projects 2011 Budget Deficit to Be 1.5 Trillion: Bullish for Gold?

The Congressional Budget Office, on February 7, 2011, projected that the 2011 federal budget deficit would be 1.5 trillion dollars. That is 9.8% of GDP, just shy of the 10% of GDP reached in 2009. We have not had deficits this large since, hold your breath, 1945.

Under current CBO projections, the federal debt “held by the public” (i.e. excluding the 4.6 trillion owed to the Social Security and Medicare system) will hit 13 trillion by the end of 2014, for a total of, yes, 17.6 trillion dollars. Furthermore, the CBO assumes 3.1 real growth in the economy this year over last and 2.8% real growth in 2012, plus an additional 3.4% real growth after that.

Yet we all know that growth in the economy requires more jobs and thusfar job creation has been non-existent. Somehow, GDP reportedly grew 2.4% in 2010, without the addition of any net new jobs. How is that possible? Really now?

According to the CBO, of the 7.3 million jobs lost during the recession, only 70,000 have been recovered since June of 2009. That is basically a rounding error of .06%. Forget about a double-dip, in terms of employment we haven’t gotten out of the first dip yet.

The first 18 months of a “recovery” typically see employment rise 4.4%. Now, 18 months later we have had .06% Let’s face it; there hasn’t really been a recovery at all.

With the US population growing and the number of jobs stagnant, the unemployment rate should have risen over the past year and a half. The headline unemployment figure, however, is now a comforting 9%, down from 10% previously. Why? Well, more and more people have given up looking altogether. Labor force “participation” has dropped to 64.2%. In other words, 35.8% of working age adults now aren’t working, have given up looking, have taken an early retirement, or have decided to stay home with the kids.

The reported fourth quarter “real” economic growth of 3.4% is beginning to look more and more like a statistical error, or perhaps just wishful thinking.

The key point is this: the budget deficit is very, very high. The prospect of it declining in the future depends on “real” economic growth (which has yet to materialize in any form whatsoever and for which there is no fundamental driver now that real estate is dead).

It also depends on a divided Congress allowing signficant tax increases, which are set to return under current law, to go into effect in 2012. Will they? Sure they will.

Finally, President Obama in his State of the Union Address described America as facing a second “Sputnik Moment” and proposed massive new investments in technology, infrastructure and education to keep American competitive. And he proposed to do it without raising spending. OK, sure.

Even without all this new “Sputnik Moment” investment, whatever form it takes, the CBO estimates that government expenditures will continue to rise despite the wind-down of TARP, implementation of proposed cuts in Medicare payments to physicians, and the lapsing of extended unemployment benefits.

Indeed, even under its rosy scenario (3% growth and tax hikes) projections, the CBO is forecasting budget deficits of 1.1 trillion in 2012 and 704 billion dollars in 2013.

Without the CBO’s rose-colored glasses (i.e. with continued limited growth and leaving taxes unchanged), we are looking at something like 1.5 trillion dollar deficits as far as the eye can see. And a Treasury debt of around 21 trillion dollars in just four years.

OK, now just step back for a second and think about this. Treasury is going to try to borrow about 6 trillion dollars (or 40% of the output of the largest economy in the world) over the next four years. From whom? And what is that going to do to interest rates? (Just imagine the current US housing market with 9% mortgage rates. No one wants to see that. Talk about Armageddon.)

The Federal Reserve simply has to keep interest rates low, and this means continued quantitative easing (i.e. money printing) as far as the eye can see.

The current bull market in gold has a long, long, long way to go. Unless I missed something… but what?

The recommendation would be to buy the gold ETFs (GLD, IAU). Sure, they are up almost 20% per year for the past five years. But with money printing like what is coming, we’ve got a long way to go in this one, maybe another decade or two. In the near term, a pullback is possible, use it as a buying opportunity. Gold, however, has been going mostly sideways for almost four months now. That is about as much rest as the shiny metal has needed in recent years as it continues its ascent to the top of our mountain of debt.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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