Last week, the Treasury Department announced that America’s budget deficit for the fiscal year ending September 30 will be roughly $500 billion, the smallest it’s been since 2008. This was hailed as good news in most quarters.
Considering that we’ve been running deficits closer to (or over) $1 trillion for the last five years, I suppose it is good news, relatively speaking. But I can’t buy into the optimism. For me, the fact that prominent people are praising our government for only spending $500 billion more than it is takes in is depressing–and scary. It’s a clear symptom of how warped our thinking on the issue has become.
When I’m scouting dead-companies-walking, I look for a number of factors. Businesses fail for all sorts of reasons, after all. But there are almost always two main symptoms of a company in terminal condition: falling revenues and mounting debt. These twin problems feed one another and create a kind of corporate death spiral. As revenues drop, debts rise. Making matters worse, creditors begin to demand higher and higher interest rates to service that debt, which means that repaying it eats up more and more of a company’s shrinking revenues. Pretty soon, that company can’t meet its obligations and its only option is to declare bankruptcy.
I usually find comparisons between government and business strained. But with a government shutdown looming by midnight tonight and the very real possibility that the U.S. Treasury will renege on its credit obligations becoming more likely every day, Washington D.C. is starting to look like the dysfunctional boardroom of a business fast on its way to insolvency.
Despite the unendingly grim economic news out of the euro zone, most major European stock markets have shown robust growth over the last year. The German DAX is up over 32 percent since June of 2012. The Swiss Exchange is close behind at almost 30 percent growth over the same time period, and the Euronext 100 and CAC 40 have both risen by almost 25 percent. Heck, even the Athens Stock Exchange seems to have temporarily risen from the dead. It’s up more than 77 percent in the last twelve months.
So is it time to put aside our fears and jump into this rally? I have three answers: no, hell no, and don’t you dare.
Europe is a dead-continent-walking. These short term gains notwithstanding, European stocks may very well be the biggest value trap in the history of capitalism–though the reasons why might surprise you. It’s not just because of the region’s low-to-no economic growth, crushingly high debt levels, and disastrous austerity policies. Europe is “going to zero” in a different, more fundamental area, as well.
Something very weird has happened to me recently. To my surprise, I have caught the gold bug.
For most of my career, I could never understand why anyone would listen to the wacky newsletter writers that promoted gold. They were almost all rabid conspiracy mongers–people who believed 9/11 was an inside job or that a sinister cabal of Illuminati secretly controlled our government.
And yet, I now think that anyone who doesn’t have gold in their portfolio should buy some, and those that already do own gold should buy some more.*
An unsurprising bit of news broke this past week–some highly respected experts screwed up.
A few years back economists Kenneth Rogoff and Carmen Reinhart claimed that countries with high debt loads suffered slow growth rates. Their research was used to justify draconian spending cuts in Europe. But it turns out Rogoff and Reinhart flubbed their numbers in a big way, and Keynesians like Paul Krugman have been having a grand old time gloating over it. But just because Roghoff and Reinhart were wrong doesn’t mean Krugman is right.
Every year, we spend more than a trillion dollars more than we take in. That’s a dire situation. But how we’re spending that borrowed money is the real crime. In short, old people are killing us. That’s right, I said it: if we don’t do something soon, grandma and grandpa are going to bleed us dry.