The financial markets ended the week strong and all the bad news is being discounted. Gold & silver took a hit as investors locked in profits from the recent rise. The government deficit has once again taken a backseat to other news. Nobody is looking at the elephant in the room. Government spending cannot be cut easily. Medicare, Social Security, and Medicaid account for 60% of the government budget, Defense Spending and interest on the debt account for 20% thus totaling 80%. The rest of government spending accounts for 20% of the budget. Where could a politician who wants to get reelected cut spending enough to make a difference? The entitlements (Medicare, Social Security, and Medicaid) are untouchable. I made mandatory contributions into these programs my entire career with an expectation of distributions at retirement. Being “self-employed” required double the payment. I want my money back (with accumulated interest) just as every other worker wants his or her benefits. The problem is that the government took my money and spent it in other areas without my approval. If a private entity had done this, they would be prosecuted and in prison today. Many recipients have received substantially more than they paid in. The food stamp program has supported more recipients than its original intent. It has been reported that one in six are on food stamps in the U.S.
Oil prices may hit $120 per barrel by summer. 2011 is paralleling 2008 with one exception: the economy is weaker going into the year. $147 oil in 2008 caused the economy to stall whereas this year I expect the same impact at $120. I hope you bought that fuel efficient vehicle, we did. If the oil prices gather steam and approach $120, then the stock market will head back south again.
Gold prices are correcting again. Over the last 10 years of this bull market, I have heard naysayers call the end of the rise of gold. Each time they were wrong. Are they right this time? From a macroeconomic view, one would expect gold to continue its rise relative to the fiat currencies. Right now, the U.S. Dollar is the best looking house on an ugly street but it is still ugly! Nothing has changed from a fiscal point of view. Government spending is propping up the economy and true unemployment is still high. It will be several years before unemployment and housing can be corrected. Don’t forget the toxic debt on bank balance sheets. The banks are still misrepresenting their financial health. If interest rates rise, the Fed could become technically insolvent. If that happens, the U.S. taxpayer would be the lender of last resort. Is the U.S. economy unsinkable?