February 2024 - Week 3 Edition

The CBO Director Says, “The Current Fiscal Trajectory is Unsustainable.”

Last week, the non-partisan Congressional Budget Office (CBO) came out with a 10-year projection based on current policies, called “The Budget and Economic Outlook, 2024-2034.” Their deficit picture calls for a slight reduction in red ink this year, even though the real numbers are not cooperating with them so far.

In the first four months of Fiscal Year 2024 (beginning October 1, 2023), the federal government has run up $603 billion in red ink – that’s $77 billion more (+14.6%) than in the same period in 2023.

Much of this is beyond the control of Congress, a result of higher interest rates and higher inflation.

For instance, in the first four months of Fiscal 2024 (October 1, 2023 to January 31, 2024), there was:

• A $93 billion (+47%) gain in net interest payments on public debt from rising interest rates and higher debt.

• A $80 billion (+9%) increase in the largest mandatory spending programs, due to cost-of-living adjustments.

• A $31 billion (+12%) increase in spending by the Department of Defense, mostly for personnel benefits.

The CBO’s long-term deficit projection is for budget deficits to “climb as a percentage of GDP, returning to 6.1 percent in 2034. Since the Great Depression, deficits have exceeded that level only during and shortly after World War II, the 2007–2009 financial crisis, and the coronavirus pandemic.” The CBO further states debt held by the public will reach an all-time record 116 percent of GDP in 2034 and “In the two decades that follow, growing deficits will cause debt to soar to 172 percent of GDP by 2054.”

Unfortunately, past experience shows these forecasts may be too optimistic. In 2010, the CBO projected the federal debt-to-GDP ratio would reach 80 percent by… 2049!  Well, we actually reached that milestone in 2019, as revenues were lower than expected and spending went sky-high.

In testimony before Congress, CBO director Phillip Swagel said, “I can tell you that I am very confident that the fiscal trajectory is unsustainable.” Interest payments on the debt, now around $800 billion, are projected to double to $1.6 trillion in 2034. Annual spending will rise from $6 trillion to $10 trillion in 2034 and the national debt will almost double, from $26 trillion in 2021 to $48.3 trillion in 2034.

If those trillions make your head spin, a deficit of “only” $1.6 trillion per year translates to $50,000 each second, or $3 million in red ink per minute, more than most Americans make after taxes in a lifetime.

According to the U.S. Treasury, bond issuance reached a record $2.3 trillion in 2023, hitting a record $776 billion in the fourth quarter. The Treasury also announced plans to borrow $776 billion this quarter and $816 billion in the next quarter – an annual rate of over $3 trillion – at a time when new bond yields yield 4%-5%. This year, interest costs are on pace to surpass defense spending in a year of record bond issues.

Each week, we hear of new spending bills, including $95.3 billion in aid for foreign wars, a $1.7 trillion new omnibus spending bill taking shape for a March vote, and Biden’s latest plan to skirt court review to fund college debt relief to millions of students who took out loans to fund over-priced tuition.

As a result of profligate overspending by Congress for several years under both parties, U.S. debt has already been downgraded twice in the past year, first by Fitch in August and then by Moody’s in November. A third downgrade could send investors out of the dollar and into other currencies or gold as a crisis hedge.

In its report, the CBO failed to estimate future inflation rates. In all fairness, there’s no way to predict long-term inflation. Although the rate of inflation has come down, the Bureau of Labor Statistics says the change in prices from January 2021 to January 2024 is +33% for gasoline, +24% for electricity and +21% for groceries, while the real median middle-class household income is down by $4,000 since 2021.

The combination of rising inflation, rising debt and rising interest rates will eventually doom the dollar as a reserve currency and send investors and average families protecting their savings to the safety of gold. As we know from experience, a gold bull market pulls many more investors into bullion coins and then, within 6-12 months, a good portion (maybe 15% to 20%) of those coin buyers move up to numismatic coins, boosting demand and some prices.

Gold and Silver Have Risen an Average 9.4% to 11.4% in the Past Five Election Years (And Much More in the 2020 Biden/Trump Contest)

Precious metals rose by an average 9.4% (for gold) and 11.4% (for silver) in the five elections since 2004. All of these elections were hotly contended, especially the last election, Trump vs. Biden. That rematch is on track this year, with even more contention, as both candidates are not only older (78 and 82 on Inauguration Day, respectively), but both are under legal and political scrutiny like never before.

In 2020, silver rose 47.4% and gold rose 24.4%. Part of this rise was the aftermath of COVID but much of it was also due to the controversy over the election process and its long-unresolved results. That could be repeated this year, even though each party may draft a better, younger candidate by convention time.

The only negative number in the chart below is silver in 2008. During that year, silver rose from an opening price of $14 to $49 in April 2008 before falling to nearly $10 in December, during the worst panic months of the Great Financial Crisis of 2008. So, your investment success was dependent on when you bought gold and silver in 2008.

Gold Continues Gains as Election 2024 Ramps Up

Gold rose $6 on the Tuesday (post-holiday) opening, February 20, and gold is up $35 in the past week, after touching $1,990 last Tuesday. Silver is back above $23 per ounce, after touching a recent low of $22 a week ago. In Tuesday’s futures market, April gold was up $14.30 to $2,038.20, mostly on lower interest rates in China (due to their falling mortgage market) and a drop in the U.S. Dollar Index. Also, gold and U.S. dollar traders are awaiting the Wednesday release of the minutes for the last FOMC (Fed) meeting, which was so hesitant about making the first interest rate cut. Since then, however, most economic indicators have been weak (notably retail sales) and the CBO released a “doomsday” report on debt. So, there may be better odds of the Fed starting their rate-cutting series for May 1^st rather than in June.

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