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U.S. Monetary Inflation as Budget Deficit $2 Trillion Higher than a Year Ago!

Economics / US Debt Aug 03, 2009 - 04:10 PM GMT

By: Ned_W_Schmidt


Best Financial Markets Analysis ArticleAccording to the diligent statistical elves of Barron’s Market Lab, the amount of U.S. Treasury Gross Public Debt outstanding is $11.611 trillion. A year ago, according to the same elite statisticians, that  value was $9.533 trillion. In one year, the true deficit of the U.S. government was therefore $2.0178 trillion. That, my fellow Gold bugs, is a true accomplishment! How does one spend Two Trillion Dollars more than one receives in a single year?

Now, the deficit reported by the U.S. government will be less than that value due to something called the unified budget. Essentially what that means is that the money going into such schemes as the Social Security System is used to buy U.S. government debt. Such transactions are used to mask the true deficit from the public. Now, those of you in the U.S. should not worry about this. You will indeed get all the green pieces of paper upon retirement you have been promised. They just may not buy anything.

Two essential problems now exist. First, the Presidential Approval Index for the Obama Regime is negative, and has been so for some time. Despite massive spending by the U.S. government, voters are discovering that change can mean many things. The Obama Regime, facing fading popularity, has only one policy choice. That choice is to spend more money. Clearly, not enough money is going to people to maintain their support. So, look for more deficit spending from the U.S. government.

Second problem is the U.S. Federal Reserve, and it has many sub issues. In the past year, the Federal Reserves has purchased US$921 billion of paper debt. As money is fungible, this action was the equivalent of a cash delivery by truck to the U.S. Treasury. While subterfuge is used to mask that reality, the consequences are the same. Those purchases represent nearly half of the Obama deficit. Or in the words of economists, about half the U.S. government deficit has been monetized.


Our first chart this week is one we have reviewed before. The solid green line, using the right axis, is the monthly average price of $Gold. The line of red circles is the inflationary component of U.S. monetary growth, and it uses the left axis. The black triangles are buy signals created from the measure of monetary inflation. When it is negative and then turns positive, a buy signal is created. We will come back to that far right signal in a moment.

Those massive purchases of debt by the Federal Reserve are what created that spike to more than 12% in the measure of monetary inflation. That action brought Gold out of the slump in which had been trapped. However, the Federal Reserve backed off out of fear of inflation and the possibility of destroying the dollar. In the past three months, the Federal Reserve has withdrawn about $40 billion from the U.S. financial system. That has helped to cause the slump in U.S. monetary inflation, as shown by that line. Note that part of that slump is also a seasonal, and has happened before.

By the end of Summer, the failing and fading Obama Regime will have Congress back at work. Together, they will begin a renewed spending effort in an attempt to turn around the approval ratings of both institutions. And mind you, all of them are now focused on November of 2010, when many new names might be added to the unemployment roles.

By the end of Summer, seasonal monetary factors should turn up. Additionally, that should be accompanied by Federal Reserve becoming more aggressive, adding reserves to the U.S. financial system. The spending plans of the U.S. government will truly be geared up by then. Serious debt monetization will be necessary. All of that combined, should turn that measure of U.S. monetary inflation back positive. We are, as a consequence of that, projecting out a buy signal in a September-October time frame.

On a more current basis, we are witnessing a herd action in nearly all financial markets. As we write this, the U.S. stock market is rising dramatically, $Gold has jumped, oil up more than $2, and the dollar was being sold with gusto. Like the picture game small children do, which of those does not belong in the picture? All of those actions do not go together unless a mindless throwing of money into markets is underway. That is especially true given the recent net withdrawal of liquidity from the U.S. financial system by the Federal Reserve.

As our last chart shows, $Gold is now again over bought. On a purely short-term basis, this week is not the time to be following the institutional herd into Gold or Silver. A time will come later to make wiser purchases, as it always does.

Policies of the Obama Regime and U.S. Federal Reserve should make $Gold one of the better investments for the years ahead. Once debt monetization occurs, no political will is going to develop to remove it! A strong dollar is not likely to emerge from these policies. Investors just need to be make purchase with calm thinking. Rushing to buy Gold when some analysts are promoting a rumor on dollar devaluation before year end in order to sell newsletters may not be calm thinking.  Should you feel compelled to buy Gold this week, do so knowing that the Federal Reserve and the Obama Regime will be doing all they can to make your purchases profitable!

By Ned W Schmidt CFA, CEBS

Copyright © 2009 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to

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