Editorial: US budget folly to extend commodities boom

U.S. politics veered into the surreal this week, as U.S. President Barack Obama unveiled a deficit-laden, US$3.73-trillion budget proposal for fiscal 2012 that completely ducks the critical issue of unsustainable spending by the U.S. government that will lead to the end of U.S. economic leadership globally.

With the U.S. federal deficit already expected to hit a record high of US$1.645 trillion this fiscal year on expenditures of US$3.82 trillion, the deficit for fiscal 2012, which starts this October, is projected to be US$1.1 trillion.

That means the U.S. government is now costing US$12,150 per year for every U.S. citizen. (In Canada, the federal government costs each citizen $8,323 per year.)

More to the point, under Obama’s budget proposal, the U.S. national debt would rise 87% from its current level of US$14.1 trillion to US$26.3 trillion by 2021, and there would be a large deficit every single year between now and then, as the federal budget would actually start growing again and soar past US$5 trillion by 2019.

That translates to a national debt of US$46,000 per U.S. citizen today, growing to US$80,330 per citizen in 2021, assuming the population hits 327.4 million by then.

(For comparison, the national debt in Canada is now $559 billion, or a fifth of the U.S. level on a per capita basis, at $16,500 per Canadian citizen.)

In another astounding stat, the U.S. national debt will hit US$15.4 trillion later this year, matching the country’s gross domestic product. Current budget planning ensures that the debt-to-GDP ratio will exceed 1 for the rest of the decade. The last time the debt-to-GDP ratio was this high was in the early years of the Truman Administration.

In short, despite all the lip service prompted by the Democratic Party’s mid-term election losses last November, the U.S. government is making no plans whatsoever to reduce the national debt, and is hurtling the country towards a point of no return when it will have trouble simply servicing the debt, especially if interest rates must rise to attract bond investors.

As many in the gold community have long predicted, rather than tackle the prickly issue of how to slash unaffordable “mandatory” programs such as Social Security, Medicare, Medicaid, the new semi-socialized medical program, and the Troubled Asset Relief Program, American politicians from both sides of the aisle are content to kick to ball down the road for another day and continue these intergenerational Ponzi schemes.

Unfunded liabilities in the U.S. (i.e. the big three: Social Security, Prescription Drug and Medicare) now total US$112.6 trillion, or a staggering $1-million liability per taxpayer.

This dereliction of fiscal leadership virtually guarantees that any mandatory U.S. federal benefits that get paid out in the decades to come will be done with a seriously debased U.S. dollar.

The sheer cowardice of the American political class to address the debt crisis is most distressing and unworthy of a great power. Sadly, and pointing to deeper social problems, the politicians are broadly reflecting the wishes of most Americans – even the relatively deficit-hawkish Tea Partiers – who in polling consistently reject the idea of making cuts to federal entitlement programs, which already make up more than half of federal government spending and will only grow each year this decade.

And none of this takes into account the debt crises in many U.S. states and municipalities. Total U.S. state debt lies at US$1.6 trillion and total U.S. local debt comes in at US$1.7 trillion. Any federal bailouts of these sad-sack jurisdictions will be expensive and socially divisive, as those from fiscally prudent states will be hounded into bailing out the spendthrifts.

As many have said, governments have a spending problem, not a revenue problem, as total federal, state and local government spending in the U.S. now stands at a mind-blowing US$6.7 trillion per year, or US$21, 901 per citizen.
Add to the mix that personal debt in the U.S. stands at US$16.2 trillion, or US$52,091 per citizen, and 44.2 million in the U.S. now receive food stamps, or one in every seven Americans.

There are four steps the U.S. government must take now to return the country to sound financial health: slash federal entitlement programs; return the housing market to free-market principles; diminish the power of public-sector unions; and overhaul and simplify the tax code. And none of these are on the table at the moment.

It’s not exactly the most fun way to make money, but all this translates into continued good news for commodities investors, particularly those into precious metals, which continue their time-tested role as a store of wealth in an era of fiat currency debasement.