On Monday, February 5, President Bush will go to the US Congress with a request for almost $US 750 Billion in "defense spending". This is but a component to the almost $US 3 TRILLION budget he will present for the fiscal year of 2008, which starts on October 1, 2007. At the same time, Mr Bush is claiming that this budget is the first in a series which will "balance" the US budget - by the year 2012 - without rescinding any of the tax cuts he has forced through over his term and a half in office. Yes, it is astonishing that a claim of this nature should actually be "debated" in such an August convocation of "legislators" as the US Congress professes to be, but that is what is going to happen.
Meanwhile, while the US Congress prepares to debate the spending of almost $US 3 TRILLION, the REAL US economy - the one which produces economic GOODS which cannot be conjured out of thin air or run off a printing press - continues to go backward. In January, inventories in the US contracted for the second time in three months, falling to their lowest level since 1984. This fall in inventories was not a result of industry working off an overabundance of unsold goods, it was the result of a precipitous fall in new orders which convinced manufacturers and importers that demand in the US is drying up.
On top of that, it has now come to light that US savings in 2006 were at their lowest ebb in 74 years. The US savings rate was negative for an entire year in 2006, as it was in 2005. Such a two year sequence has only happened once before in US history, in the years 1932 and 1933. In those years, one-quarter of the US workforce was unemployed and savings were savagely depleted to clothe, feed, and house themselves. In 2005 and 2006, official US unemployment was well below 5 percent. The negative savings rate was a product of spending rising faster than income, and of the vast amounts of borrowing which made up the difference.
Please note this carefully. In 1932 and 1933, the last time that the US experienced a negative savings rate for two consecutive years, there was no US welfare state. Neither "social security" nor "medicare" yet existed. Government was not (yet) the "nanny state". Fast forward to the present. In the interim three-quarters of a century, attitudes in the US and in the "West" have turned 180 degrees. Now, the need to "save" is not felt, since everyone "knows" that the government is there to provide.
And there is another HUGE difference between 1932-33 and 2005-06. In April 1933, President Roosevelt made the ownership of Gold in the US against the law. In January 1934, he transferred title to all "Gold Certificated" held by the Fed to the US Treasury. From that day to this, all Federal Reserve notes (aka US Dollars) have been irredeemable in ANYTHING by US citizens. By the time US Gold ownership was once again made legal at the beginning of 1975, there was no longer any official tie between the US Dollar and Gold.
The doors to what was seen (especially after 1971) as "unlimited debt issuance" were opened. Now, the US (and the West) is nearing the end of that road with national savings rates in the US having returned to the levels they were at the height of the 1932-33 Great Depression. The culmination of the crisis back then was the closing of every major bank in the US for a week and a monetary revolution. Today, to all appearances, there is no crisis at all. The Fed calmly reports (price) inflation rates of 0.1 percent (for December 2006). On Wall Street, the Dow reaches new all time highs on a weekly basis. Everyone is falling all over themselves and each other to reassure all who will hear them that the US economy is in fine shape.
The ones who know that it is NOT in fine shape are that dwindling band of PRODUCTIVE Americans, those who deal with the production and distribution of economic GOODS, not the manipulation of "money", in their daily lives.
Gold traded as high as $US 660 this week, but did not close there and then fell away at the end of the week. As stated in our Gold Bull Market Commentary", one of the reasons given for this fall was a statement by the US Defence Secretary that the US had no plans to go to war with Iran. Interesting that in light of this, and of a rebound in the exchange value of the US Dollar, the $US oil price actually rose by $US 1.72 to its highest level since the beginning of January.
The last time that US savings rates were this low was at the end of the era of honest money at the beginning of the 1930s. Back then, individuals were used to providing for their own futures and were happy to do so because they were equally used to a money which retained its purchasing power. Today, with Gold and "money" having been separated in the US for three-quarters of a century, the only constant left in the "money economy" is the continual LOSS of purchasing power by the monetary unit.
Before the Great Depression of the 1930s, Americans trusted their money, lived within their means for the most part, and saved to provide ease in their old age and/or to see them through any "hard times" they might have to face. Today, people "trust" their ability to borrow and spend and expect the government to prevent any "hard times" from ever occurring through their manipulation of "money". Yet with all this, the actual economic condition of the American public is now back to what it was in the depths of the Great Depression.
In the REAL economy of the US, the "hard times" are already here. In the "money economy", the only thing that is staving them off is the fact that the US government can still issue Dollars and receive the REAL goods of the rest of the world in return for them. That ability is, by its nature, finite. All empires are ultimately supported on debt, and all crumble when the debt crumbles. That is the point at which the REAL economy and REAL money - Gold - re-connect with each other. It has happened countless times before in history. It will happen again. It's only a matter of time, and with US savings rates now back to Great Depression levels, time is running out.