Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

America’s Only Choices Left: Raising Taxes, Introducing Austerity Measures

Friday, November 23rd, 2012
By for Profit Confidential

Introducing Austerity MeasuresWhile debt-infested countries in the eurozone are struggling to decrease their budget deficits, the U.S. government is reporting an increase in its deficit. For the fiscal year of 2012, the federal government budget deficit was $1.09 trillion, slightly below 2011’s deficit of $1.29 trillion. (Source: U.S. Department of the Treasury, October 12, 2012.) As a percentage of gross domestic product (GDP), the U.S. government’s budget deficit for the year 2012 stands at seven percent.

Yes, some might jump on the “decline” in the federal budget deficit in 2012 over 2011, but there is more to it. For the first month in the current fiscal year of 2013, which ended October 31, the deficit increased by $120 billion. This is an increase of almost 22% from the same month last year—$98.0 billion in October 2011. (Source: Department of the Treasury, November 13, 2012.

In the month of October, U.S. government spending was much higher than the previous month. In September, the U.S. government spending was $186.3 billion, in October 2011, it was $261.5 billion. In October of this year, government spending reached a staggering $304.3 billion—an increase of 63.3% from a month earlier and 16.4% from October last year.

So all this talk of lowering the government’s annual budget deficit seems to be just that; talk. Increasing budget deficits is not good for any country; every economist would agree with me on this one. So, where do we go from here?

The issues in the U.S. economy are becoming similar to the ones in the eurozone countries. For example, in those countries, government spending simply was greater than tax revenue, hence the basic reason behind the deficit.

In the U.S., 2012 marked the fourth year in a row where the government experienced an annual deficit above $1.0 trillion.

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I expect the budget deficit of the federal government to continue in the annual $1.0-trillion range. It doesn’t require a lot of research to come to that conclusion. Averting the fiscal cliff is nothing but a promise of more government spending and an increase in the government’s deficit.

Further, I don’t think U.S. economy has any chance of improving anytime soon. Once a family starts spending more than it earns, it is very difficult to get back on track. Our financial situation is poor in the U.S. and our expenses are increasing daily.

Dear reader, brace yourself for picking up the tab of government spending. Your taxes will go higher and the austerity measures you hear about in the eurozone are a very likely scenario for our U.S. economy. If you thought your income was declining, wait until the government tries to get its act together.

In the eurozone, many countries have raised taxes on citizens and introduced austerity measures. Does the U.S. really have any other options other than that combination?

Michael’s Personal Notes:

What no politician has the guts to do:

Step 1: stop printing more fiat currency; Step 2: have all fiat currencies backed by gold.

It wasn’t too long ago that the global economy had the gold standard—only a certain amount of money was printed and that printing was based on the holdings of gold bullion a country had.

Now, after a few decades of running away from the gold standard and flooding global economy with paper fiat currency that can be created out of thin air, countries are regretting what they’ve done.

We are starting to see countries in the global economy turning their attention towards gold as a source of safety—something that has stored value for much longer.

Since the inception of paper money, the amount of economic risk in the global economy has simply increased. The biggest concerns are inflation and the constant debasement of money. A dollar U.S. in 1970 is now worth $5.96 in the U.S. economy. (Source: Bureau of Labor Statistics, November 14, 2012.) For American citizens, their currency value has declined almost five-fold since we stepped away from the gold standard. It’s the same situation elsewhere in the global economy. Fiat paper simply has less purchasing power as the year passes.

All this leads to a simple question: to stop the erosion of the purchasing power of paper money, what do we do? Go back to the gold standard?

The Prime Minister of Turkey thinks we should do just that. He is urging the International Monetary Fund (IMF) to consider gold as its base currency. He suggested that the IMF has heavily relied on the U.S. dollar and this factor alone has caused more chaos for the other countries in trouble. (Source: Sabah, November 14, 2012.)

Along the same theme, a study done in the European Union (EU) is recommending countries in the eurozone area use gold as collateral, as this can bring down their borrowing costs. If the eurozone area combined all its gold and pegged it to the euro, it could potentially put a stop to the crisis destroying the global economy. The eurozone area has 10,792 tonnes of gold. (Source: CNBC, November 5, 2012.)

From all of this, what I get is that gold bullion prices are going to increase. Uncertainty and debasement of currencies in the global economy will certainly change attitudes of countries toward gold. Are we going back to the gold standard? I don’t know, but for a gold bull like me, what’s happening with the deterioration of the purchasing power of fiat currencies is a good sign for gold. As the global economy deteriorates further, we might just get a gold rush dominated by central banks—and I believe we are already seeing some action on this.

Going forward, I will not be surprised to see more world leaders coming out and agreeing with the prime minister of Turkey. Fiat currencies have created more trouble in the global economy than they have benefits.

Where the Market Stands; Where it’s Headed:

For the Dow Jones Industrial Average, we are near the end of a multi-year “head-and-shoulders” formation.

In technical terms, looking at the multi-year chart, the left shoulder was created over the years 1995 to 2002. The neckline was created in the years 2003 to 2007. The right shoulder creation started in 2008. The right shoulder has likely reached its peak and we are now starting the long-term trend down for the right shoulder.

At this exact moment, the market is oversold from its recent sell-off, but any upside rally will be limited in scope.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in Profit Confidential, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

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  • Bruce Miller

    China's play: to alter 'Global Energy Maps' forever with cheap, safe, mass producible, Thorium reactors, starting by 2017.

    (See:
    http://www.youtube.com/watch?v=5UT2yYs5YJs)
    (See:
    http://www.investmentu.com/2011/September/thorium-the-future-of-nuclear-power.html)
    (www.theoildrum.com/node/4971)
    Do you remember:

    "It is imperative that no Eurasian challenger emerges, capable of dominating Eurasia and thus of also challenging America… In that context, how America 'manages' Eurasia is critical… the three grand imperatives of imperial geostrategy are to prevent collusion and maintain security dependence among the vassals, to keep tributaries pliant and protected, and to keep the barbarians from coming together.” – Zbigniew Brezinski, The Grand Chessboard

    Who slipped up?

  • anononodon

    Maybe if all the as sholes who call themselves CEOs had not shipped all of our manufacturing off to CHINA then we would have paychecks to pay taxes with.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles