Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Gold, Goodwill, and Economic Growth

Commodities / Gold and Silver 2010 Jun 08, 2010 - 12:11 PM GMT

By: Michael_S_Rozeff

Commodities

Best Financial Markets Analysis ArticleA correspondent suggested to me an idea about government balance sheet goodwill that's worth sharing. That led me to a few further thoughts about gold and economic growth. The basic idea behind all of this balance sheet analysis is simple. A stronger balance sheet of the government means a stronger fiat currency and a lower price of gold in that currency, other things equal.


If we look at the balance sheet of the United States (meaning the national government), it appears that the assets are worth less than the liabilities. I used as an example that the $2.2 trillion of current tax revenues might grow for 2 percent forever and be discounted at a 4.5 percent rate. This gives a present value of $90 trillion. But we read that government liabilities may exceed this by $60 trillion or even more. (See, for example, Laurence J. Kotlikoff's paper "Is the United States Bankrupt?")

The suggestion made was that maybe there is an intangible asset being left out, which is goodwill. That's a useful way to think about balancing the balance sheet. In this case, if the total assets (tangibles and intangibles) and liabilities are 150 trillion, then 60/150 = 40 percent. This is a large share of intangibles, which suggests its existence may be questionable.

What's in this goodwill? More taxes. One such intangible asset is the government's capacity to raise taxes. When people worry about the government seizing assets in 401k accounts or forcing such accounts to buy United States bonds, they are envisioning this missing government asset. Kotlikoff mentions a national retail-sales tax. Others mention value-added taxes. These are all examples of ideas to make the government balance sheet balance by increasing the assets, as opposed to explicitly cutting down the government's promised liabilities, or making the government's real payouts be less than the promised amounts by defaulting.

Higher taxation is a double-edged sword, for any significant tax increase will lower economic growth and cut the growth rate of tax revenues. It may enourage more government spending. It seems to me that such a step will weaken the balance sheet overall.

A government tax increase is a government asset, but it's a taxpayer liability. The taxpayers either will pay for the promised government benefits or else they won't get them, which means government defaults on its promises. There are no other ways left except to invade some other nation and steal its wealth.

Balance sheets balance. The United States balance sheet will balance, one way or another.

We can invert the problem of the imbalance in another way. At what perpetual growth rate of national income would the assets be worth $150 trillion? The answer is just a tad under 0.03. In other words, if the U.S. economy grows at 3 percent forever and if the discount rate for taxes is 4.5 percent, then the United States' balance sheet balances. The tax revenues then have a present value of 150 and so do the liabilities. Apparently, Kotlikoff and others who look at the demographics and the promises made by the government do not find that growth will be sufficient to fund the promises and debts made. Notice that they exclude contingent liabilities, and they made their estimates before the depression hit and before the United States jacked up its spending.

Long-term growth is very important. That is why I focused on it in several earlier articles. Investing is paradoxical. It depends on a continuing series of short-term decisions and considerations, but insofar as these decisions look at fundamentals, the focus is on long-term matters. Present values discount the entire future. One has to look at the long-term future in any fundamental valuation approach, even if one is deciding whether to buy or sell every day of the week.

Let us say that the government share of economic activity grows, as it is projected to do in the United States. In my view, that lowers growth, because government spending is inefficient or wasted. Capital cannot grow if savings are absorbed by government and dissipated on pyramids. Lower growth undermines the currency.

In this balance sheet approach, a change in the politics that points to pro-private sector growth policies will solidify government finances, and that will strengthen the dollar and weaken gold. I am watching the Obama commission on fiscal reform due to report in December. So far there have been no news reports that leak any trial balloons.

There is an argument to be made that the world economy is the appropriate way to analyze this. All the major fiat currencies are to some extent related through central banking connections and coordination of the major governments. The world price of gold matters, not just the price in dollars. In this case, we should be thinking about a world balance sheet or a balance sheet that consolidates the major countries. Global growth, global tax revenues, global government balance sheets, and global inflation all matter.

In this approach to understanding gold, gold's price depends on the strength and weakness of the major fiat currencies, and they depend on government finances, especially tax revenues, which depend on economic growth. And all of this is filtered through what market participants EXPECT. Psychology is important.

The stronger that the politicians feel the pressures of having to maintain the welfare state in order to satisfy voters who vote for it, or the more able they are to impose the welfare state - however one looks at this - the less likely are they to stand by and let the deflationary forces work themselves out. All the major countries (China, Japan, US, UK, France, Germany) have fought the depression for several years with greater spending and more inflation. The European Central Bank joining in of late is a MAJOR event.

The first reaction of the governments to the economic slowdown was to preserve the welfare states and even to use the crisis as an excuse to enlarge them, as Rahm Emanuel made explicit. Their first reaction was instinctive: save the banking system. That's central to the structure of existing governments. They could not even bother to count the costs. Furthermore, all the major governments have a kind of cartel of governments, which is why there are so many supra-national organizations like G7, G20, EU, and IMF. They cannot afford to have any important dropouts or failures, such as Greece. This threatens the entire political structure. Again, their instincts are to save that system.

Saving it now means that the G20 is starting to make noises about fiscal restraint. Their borrowing costs are starting to rise. They will retrench if that's what it takes so that they can fight another day. They will not retrench with enthusiasm or will, however. That goes against their general thrust, which is preservation and extension of their powers. Therefore, we have to wait and see if they back up their talk with actions.

The governments have backed themselves into a corner by following Keynesian or neo-Keynesian policies of fighting the depression with spending and money creation. Their best shot was to have gone about a process of rapidly liquidating the insolvent banks and enterprises. Instead, following their instincts and thinking this depression was just another mild recession, they went for bailouts of banks, debtholders, and government-sponsored enterprises like Fannie and Freddie.

The only hope for government balance sheets at present is a genuine economic recovery, but the policies of the governments have prevented the adjustments needed to build a basis for such a recovery that would build back their tax revenues. More and greater subsidies of failing and uneconomic activities prevent growth of the economy and their revenues. They have weakened their balance sheets and gotten only a temporary stimulus in return. If they continue along this path, they will spiral down. The world will be looking at a cadre of Japan-styled economies. If the governments do not allow renewed liquidation of unprofitable banks and enterprises and promote pro-growth measures, growth like that of Japan in the 1990s and 2000s will occur. That was 1.5 percent and lower.

The problem with renewed liquidation is that it means renewed depression for a time. It's very unpalatable politically. Tax revenues will fall off and political pressures for inflation escalate. This path threatens insolvencies of governments and turnover in control in elections. Consequently, the governments now have no easy way out. They didn't have an easy way out when the depression began, but they made it even worse for themselves. Euroland is an example of the emerging outcome, namely, a resort to further debt buildup and further central bank quantitative easing (inflation).

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

© 2010 Copyright Michael S. Rozeff - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules