Goldman Sachs forecasts a federal deficit of $3.6 trillion for the current fiscal year. Last year’s deficit was a mere $984 billion, for a 3.6- fold increase. Fedgov’s fiscal year ends September 30.
The widening deficit stems from a myriad of issues, including last month’s $2 trillion rescue package. Further increasing the deficit will be reduced tax revenues because of most states’ “stay at home, don’t go to work policies.”
Big bull market moves in the metals have come during—and immediately after—loose monetary policies. During the Vietnam War, Lyndon Johnson gave us “guns and butter.” Historically, when countries go to war, they cut back on domestic spending to support the war efforts. But not LBJ.
In the late 1960s, gold broke out of the 1944 Bretton Woods Agreement, which required the US Treasury to redeem paper dollars in gold at $35/oz. For a short time, gold traded in the $38 range. Then it soared to nearly $200 by 1973. That run was greatly helped by President Richard Nixon when he “closed the gold window” and stopped redeeming dollars in gold on August 15, 1971.
During the Jimmy Carter years in the White House, inflation heated up—because of deficit spending–and reached 13%. Gold climbed to $850 and silver to $50 in 1980.
When Ronald Reagan took office in 1981, he called Paul Volcker, the then chairman of the Federal Reserve, to his office and basically told him he had to shut down inflation. In doing so, Volcker jacked interest rates to 21%, which not only reduced the rate of inflation but also put the economy in a recession.
The metals entered a long bear market from 1980 to 2000, with a few minor rallies along the way. In 2000, though, we had the dotcom bubble in tech stocks as the Internet became a way of life for Americans. When the dotcom bubble burst, the metals began to climb.
Gold reached $900 by 2008, but then came the housing bubble that had been created by Fed Chair Ben Bernanke’s low interest rate policies. Bernanke followed with three QE programs, taking the Fed’s balance sheet to $4.2 trillion. Gold and silver responded, climbing to $1900 and just short of $50.
Now the Fed’s balance sheet exceeds $6 trillion.
When the Fed was created in 1913, it was authorized to buy only government securities and to extend loans to member banks. Now it is buying mortgage-backed securities, Federal agencies’ debt, repurchase agreements with dealers that trade Treasury debt, and junk corporate bonds.
The 2008 bailout started with Congress’ $700 billion Troubled Asset Relief Program (TARP). When it became obvious that $700 billion wasn’t enough, the Fed came with its quantitative easing programs, dubbed QE1, QE2, and QE3. It is difficult to determine when one QE program ended and the next began.
Now we’re into QE4 with next to no one complaining about the massive amounts of money being created.