Austerity in the U.S.A. Many believe it could never happen as the public would not accept meaningful tax increases and/or spending cuts to bring our budget deficit under control and address the unsustainable growth in our national debt. We have always believed that printing money was the only solution. A solution that would, in the long run, destroy the Dollar and lead to runaway inflation. That belief is the primary factor driving the bull market in gold and silver.
But the world changed this weekend. S&P had the guts to put down on paper what we have all already known. Absent meaningful reform, holders of US Debt will realize substantial losses in the future – either through default or inflation. Whereas the politicians and traders believed we would be able to kick the can down the road for at least another 10-20 years, the downgrade served as a shocking wake up call. While the public didn’t care much about the 2008 crisis and the bailouts – the downgrade of our debt has hit Joe and Jane Sixpack like a ton of bricks. In fact, it has been a trending topic on Twitter since the announcement was made last night. Beating out Snooki as a TT is a very big deal.
Which means that the issue is front and center for the public and that has finally given Washington the political cover to take action. Harry Reid has already issued a statement calling for tax hikes (which polls show the public supports). Republicans will surely call for spending cuts and a balanced budget amendment. The public will accept a little bit of both. Austerity is coming.
Austerity is the worst thing for gold and silver. Austerity through sharply higher interest rates broke the gold and silver bubble in 1980 and would do so again today. So, while many may believe the downgrade will result in a sharp decline in the dollar and a rally in gold and silver, I think the opposite. The U.S. finally has the political cover to take meaningful action to address our long-term structural problems. If they follow through on that, I think the gold and silver bull market may be over.
What do you think?