February 2023 - Week 4 Edition

Inflation Indicators Remain Stubbornly High in January

Last week’s inflation indicators put a damper on gold and stocks. Both major inflation indicators came in “hotter” (higher) than expected, indicating the Federal Reserve may raise interest rates two or more times later this year in their attempt to squelch this stubborn inflation they helped cause. First, on February 14, the Consumer Price Index (CPI) for January was announced at +0.5% (a 6% annual rate) and the key housing index rose an unexpectedly high 0.7% and 7.9% in the past year. On Thursday, February 16, the Producer Price Index was up +0.7% (an 8.4% annual rate), with a “core” rate of +0.6%, or triple December’s rate.

The U.S. Dollar Index has also reversed, rising in February after an 11% drop from the end of September to the end of January. The previous dollar decline has been the main engine behind gold’s late-2022 and January 2023 strength. By the same token, the rising dollar in February is part of the reason for gold’s decline since February 1. The dollar is rising mostly due to the sudden expectation of more interest rate increases to fight stubbornly-high inflation and a stubborn Federal Reserve Board. They don’t consider the high cost of servicing the $31.5 trillion U.S. federal debt at 5%+ vs. the 1% rates of just one year ago.

Huge Public and Private Debts are Accumulating Faster Every Quarter

You wouldn’t know it from his State of the Union Speech but President Joe Biden is spending us into the poor house – even though the previous Trump tax cuts have given him a huge gift of two straight years of about 20% annual increases in tax revenues in 2021 and 2022 – a total gain of 43% in the last two years.

The problem is that the Democrats and some Republicans spent all that money and more. According to the annual Congressional Budget Office (CBO) review, issued last week, revenues reached a level in 2022 that they only reached three other years in history – twice in World War II (1944 and 1945) and in 2000. Revenues that high would normally balance the budget but the Biden team increased its spending to 24.8% of GDP in 2022, up from the previous 50-year average (1973 to 2022) of 21% of GDP in annual federal spending.

In his State of the Union Address, President Biden claimed, “my administration has cut the deficit by more than $1.7 trillion — the largest deficit reduction in American history.” But the opposite is true. He has added record deficit spending. When he came into office, the CBO projected a $2.3 trillion deficit in his first year. Biden’s actual deficit that first year was $2.8 trillion, an increase of $517 billion over budget. 

Biden’s team added $320 billion to the deficit last year and will add $447 billion in 2023, according to CBO data. If his policies stay in place through 2031, the CBO states deficits will be $5.45 trillion higher than they would have been under Trump’s policies. (All of this seems like a debt increase, not a decrease!)

According to the CBO, Biden’s policies from the two years just past – not counting any new programs in the future – are projected to increase federal spending from 2022 to 2031 by $12 trillion over current levels. His press secretary, unfortunately, does not speak “economics” as a third or even fourth language and can’t answer even the simplest questions about any of the CBO data or explain any of the President’s many Pinocchios in math. She spouts one or two quick (and false) statistics and walks out on the press.

Unfortunately, the consumer is imitating the government, running up record amounts of debt. Americans are throwing in the towel on inflation and buying more and more overpriced items on credit, loading up on what they want, with the assumption that there will be some kind of bailout when the bills all come in.

According to the New York Federal Reserve Bank, in their Household Credit and Debt report, a fourth-quarter debt spending binge by the public pushed credit accounts to record highs in many categories:

“Mortgage balances shown on consumer credit reports increased by $254 billion during the fourth quarter of 2022 and stood at $11.92 trillion at the end of December, marking a nearly $1 trillion increase in mortgage balances during 2022. Balances on home equity lines of credit (HELOC) increased by $14 billion, the third consecutive quarterly increase and the largest increase seen in more than a decade; the outstanding HELOC balance stands at $336 billion. Credit card balances saw a $61 billion increase in the fourth quarter, surpassing the pre-pandemic high of $927 billion. Credit card balances now stand at $986 billion, after declining to $770 billion in 2021Q1. Auto loan balances increased by $28 billion in the fourth quarter, continuing the upward trajectory that has been in place since 2011. Other balances, which include retail cards and other consumer loans, increased by $16 billion. Student loan balances now stand at $1.60 trillion, up by $21 billion from the previous quarter. In total, non-housing balances grew by $126 billion.”

This will not end without a painful day (or year) of reckoning for taxpayers and consumers alike.  With the dollar inflating at higher-than-expected rates, gold will likely take off in value once again. Now, is the time to call our professional account representatives to learn more about how you can invest wisely in gold.

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