The simple reason why governments never freely decide on fiscal responsibility is because fixing their well-entrenched problems of over borrowing and spending means that their already fragile economies would be temporarily thrown over a cliff.
America faces its own version of austerity come January. Tax hikes and spending cuts would cut $100’s of billions off of the fiscal 2013 deficit, sending the already-anemic U.S. economy into a deflationary recession. With nearly $600 billion less debt for the Fed to monetize, the growth rate of the money supply would contract, which would send asset prices and most markets tumbling. And we also will bump our heads once again on the debt ceiling come January as well. If Washington doesn’t agree to raise the debt limit there will be fiscal austerity amounting to nearly $1 trillion next year! Not to worry though, the U.S. has raised the debt limit 74 times in less than 50 years. Old habits die hard and there’s no reason to believe D.C. will achieve fiscal sanity this time.
But the truth is that nothing of any substance will be done in regards to the deficit and debt because if politicians, the MSM and Wall Street really wanted to cut the amount of red ink they wouldn’t be so alarmed about having the Sequestration go into effect. After all, the Fiscal Cliff is simply a combination of spending cuts and tax hikes that would dramatically lessen the rate of debt accumulation; and isn’t that what we all supposedly want anyway? Of course, republicans prefer to raise revenues by lowering rates and eliminating loopholes; but the key point is they both still want to increase government’s bounty—they just disagree on how to do it.
There absolutely would not be so much hysteria over the Fiscal Cliff if both parties actually held the belief that debt and deficits really matter. Therefore, it seems clear that austerity is something they can all agree on…only if it isn’t happening under their watch. However, data released this week shows how dire the debt situation really is. The U.S. budget deficit for October—the first month of the new fiscal year--expanded by 22%, to $120 billion from a $98.5 billion shortfall in the year ago period.
And you can forget about a grand bargain getting done as well. There is no way the Senate and President Obama will agree on a long term deal to slash entitlements if House republicans can only assent on cutting tax rates and eliminating a few deductions on “the rich”. They will instead punt on Austerity and all agree on staying drunk in order to delay the eventual hangover. It is blatantly and egregiously duplicitous for our government to claim that budgetary deficits and debt must soon be addressed, yet at the very same time panic about adopting measures that would address those imbalances now.
Even though austerity is the only real solution for our proclivity to over borrow and over spend, that scenario is untenable for the politicians. That is why fiscal austerity will be punted on and we will once again turn to the Fed to combat the anemic economy with unprecedented central bank intervention.
My guess is that there will be no significant reduction in borrowing and spending anywhere in the developed world in 2013. Once the U.S. officially backs away from the Cliff, commodity prices (especially gold) will soar. There will even be a huge relief rally in global markets due to the fact that governments have once again passed on austerity. Unfortunately, all that will be accomplished is to vastly increase the final collapse of fiat money and the debt that it supports.
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Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career he spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
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