Fresh evidence today of continuing U.S. monetary perfidy as Obama announces plans to build a better nest while continuing to hack at the tree in which it resides. How else to parody the incredibly mindless strategy of plunging the nation more severely into debt on what is arguably the brink of its own foreclosure?

As usual, mainstream media/perception management foils interpret the news as positive, and the industrials rally in applause. John Maynard Keynes is heard shouting his approval from the grave.

Certainly, Obama’s economic team is comprised of individuals who have in the past demonstrated a clear allegiance to the Keynesian mindset associated with robust monetary expansion along with cheap credit, bubbles be damned.

I suspect there’s a little bit too much attention being paid to the similarities between our current situation and that of 1929-34, which will come to be known as the Second Greatest Depression after this one picks up steam.

In that period, U.S. unemployment rose from 4% to 25% while manufacturing output contracted by one third. A desperate American public elected upstart democrat Franklin Delano Roosevelt in 1932, on his platform of a New Deal for the American people. Among the many reforms his government began implementing aimed at ending the depression was the National Industrial Recovery Act passed by Congress in June of 1933.

A primary outcome of the Act was the establishment of the Public Works Administration, which from 1933 to 1935 spent $3.3 billion with private companies to build 34,599 national infrastructure and housing projects. While the benefits of employment certainly did accrue to the small portion of the unemployed who got jobs during this period, the expenditure of $3.3 billion did not substantially indebt the average American on a per capita basis, nor was the American public already encumbered by a gargantuan current account deficit.

Although economists argue as to the effectiveness of that program in raising the economy out of depression, it was the onset of World War 2 that definitively ended the recession as the massive production requirements of the war machine spurred government indebtedness to 109% of GDP at its peak.

As of November 19, 2008, the total U.S. debt stood at $10.6 trillion, or $37,316 per person.

Bailout-mania and now infrastructure-mania will no doubt add significantly to that figure. While no dollar figure has been stipulated with Obama’s infrastructure development plan, his identification of “roads, bridges, internet broadband, schools, health and energy” as target segments represents the largest infrastructure investment in the United States since the 1950’s.

In another example of New Deal history repeating, Obama said he wanted strong financial oversight of banks, credit ratings agencies, and mortgage brokers to make them “much more accountable and behave much more responsibly”.

Well that sounds fine for banking, but who will oversee government? At what point does the unsustainable compounding of debt upon debt explode in the spendthrift’s face?

As you can see from the chart above, projected debt load at spending levels relative to GDP become increasingly incomprehensible in the decades to come. Is this outcome plausible? It would seem to suggest that logic has no bearing on American fiscal policy, and the solution to all of our problems is the continuous installation of larger capacity printing presses.

So how does this affect the upward pressure still building on gold? Well, besides the many reasons expressed on this web site on a daily basis, the continuation of the policy debasing the currency through endless printing diminishes the amount of gold that currency can purchase, and so the dollar value of gold expressed in that currency increases. At least, that’s what happens if there is no tampering with the price of gold.

The idea of suppression of the gold price as a mechanism of fiscal and monetary policy by the United States government continues to gain acceptance in the mainstream, as evidenced by articles published recently in the New York Post and New York Times.

Disregard the spot price as quoted by COMEX for a moment. Demand for physical delivery from futures contracts traders has risen from a traditional average of 1% to over 16% last Friday, and the price of gold for delivery in the future is cheaper than the spot price is now – a situation known as backwardation, and indicative of traders preferring retaining gold in favor of a paper profit. It is symptomatic of a confidence crisis building in the ability of COMEX to continue to deliver physical gold.

If COMEX does end up in default, the suppressive influences will be severely encumbered, if not completely overthrown, and the result may be the breakout of gold that has long been anticipated by contrarian writers.

James West
Publisher
Monday, December 8, 2008