Editorial: US budget deficits spiral out of control

The past week has been a good time to sit back and take in the big picture, especially with respect to the U.S. dollar’s slow-motion train wreck and its effect on gold.

For starters, the U.S. Treasury revealed that the Chinese government reduced its holdings in U.S. government debt by the largest percentage in nine years in June.

China now ranks as the largest holder of U.S. debt, ahead of Japan and the U.K., and in June the Chinese government unloaded US$25 billion of treasuries, or 3% of its holdings. June happened to be the same month that the U.S. treasury secretary dropped in on Beijing to try to reassure the Chinese government that their U.S. bond investments were good ones.

The motivation for the sale is familiar to gold investors: the Chinese government has publicly voiced its concerns in past months that the Obama administration’s costly stimulus plan will dramatically widen budget deficits, fuelling inflation in the U.S. and reducing the value of the dollar and thus China’s foreign exchange reserves.

The Chinese government has also openly mused this year about the growing need for a new global reserve currency to replace the U.S. dollar, even if there is no obvious substitute at the moment, gold notwithstanding.

And there’s only worse ahead in the next few years when it comes to U.S. budget deficits. On Aug. 25, the White House budget office revised its deficit projections to show exploding deficits and mounting debt over the next decade.

It now sees a cumulative US$9-trillion deficit from 2010 to 2019, an astounding US$2 trillion more than just a few months ago. In these projections, the U.S. debt will have doubled by 2019 and account for three quarters the size of the U.S. economy by then.

Meanwhile, White House advisers are predicting U.S. unemployment levels will hover around 10% for the rest of 2009 and 2010.

The more objective U.S. Congressional Budget Office paints an equally bad picture and assumes a relatively slow and tentative recovery. It dryly states in its annual summer update that “putting the nation on a sustainable fiscal course will require some combination of lower spending and higher revenues than the amounts now projected.”

The CBO estimates in its newly updated economic and budget outlook that the U.S. federal budget deficit for 2009 will total US$1.6 trillion, which, at 11.2% of gross domestic product, will be the highest since the Second World War.

The CBO further forecasts baseline cumulative budget deficits of roughly US$7.1 trillion for the 2010-19 period — or a mind-bending US$2.7 trillion higher than its own controversial-at-the-time baseline projections published in March 2009.

(The CBO’s “baseline” assumptions are that current laws are carried forward, as opposed to the Obama administration’s numbers, which assume that its policy agenda is carried forward.)

Any way you look at it, the finances of the U.S. government are a mess, with no near-term remedy in sight.

Inflating away the problem by devaluing the dollar remains the most politically expedient way out, and any hints that U.S. leaders are finally warming to the idea will be explosive for gold prices.

Recent unemployment statistics out of Nevada — one of the world’s top gold mining jurisdictions — show both the power and limitation of a vibrant gold mining industry.

As a whole, the Silver State’s economy continues to nosedive as the tourism and convention business dries up.

Statewide, the unemployment rate rose from 6.8% a year to ago to 12.5% in July, the highest level since records started being kept in 1976, and the third-highest unemployment rate in the U.S. after Michigan (15%) and Rhode Island (12.7%). If you throw in discouraged workers, Nevada’s unemployment rate was a brutal 15.2% in the second quarter.

While the jobless rate in clapped-out Las Vegas hit 13.1% in July, the pokey gold mining county of Elko in the state’s dusty northeast boasted a 6.7% unemployment rate.

Furthermore, only two of Nevada’s employment categories grew year-over-year in July: mining added 100 new jobs for a growth rate of 0.8%; and health and education services added 2,200 jobs for a 2.3% growth rate. But compare those 2,300 new jobs with the 28,000 jobs lost statewide in the April-to-June period alone.

Many in the once-booming state are now speculating that jobless rates will eventually come down as relative newcomers to Nevada pack up and leave, but that hasn’t been happening yet, as the jobs scene in many neighbouring states is almost as bleak.