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Punch: Bernanke and the Debt Ceiling by Charles Goyette - February
10, 2010
Not
long after the State of the Union address, the Congress voted
to substantially worsen that state, delivering a one-two punch
directly at the value of the U.S. dollar. Not light jabs,
but crippling body blows that will leave the prosperity of
the American people reeling. The damage this combination of
monetary and fiscal hits will do is being telegraphed in advance:
first the monetary blow, as the Senate confirmed Federal Reserve
Chairman Ben Bernanke for another four-year term; next the
fiscal blow, as both the House and Senate approved another
increase in the statutory national debt ceiling. The new limit,
a debt increase on steroids, adds $1.9 trillion to bring the
ceiling to $14.3 trillion, an amount roughly equal to the
U.S. gross domestic product.
When freshman Sen. Barack Obama said that a Bush debt-ceiling
hike was a sign of "leadership failure," he was
right. When Bush came into office the debt ceiling was less
than $6 trillion dollars; it was $11.315 trillion when he
went out the door. Bush presided over seven increases in eight
years. In less than a full year of Obama's presidency, the
debt ceiling was lifted twice. This new increase is his third.
Just the increase in the national debt under the joint leadership
of Bush and Obama in the last two years is almost three times
the entire federal debt accumulated between the nation's founding
in 1776 and 1980.
Because long-term increases in sensitive barometers like
the global price of oil and gold are a reflection of the world's
assessment of the prospects for the dollar, a referendum on
the U.S. debt and America's fiscal irresponsibility, it should
come as no surprise that under Bush and Obama, increases in
the national debt ceiling have been a harbinger of higher
gold and oil prices.
Gold tells the story in detail. In November 2004, a Republican
Congress under a Republican president raised the government's
debt ceiling to $8.18 trillion. Gold was $434 that day. Sixteen
months later, March 2006, the Congress voted to raise the
debt ceiling again, this time to $9 trillion. Gold had moved
up as well, to $556.
After the Republican majority had made a fiscal mess of things
for a few years, and sent gold to $625, Americans thought
it was time to try the Democrats again and gave them a majority
in both houses in the next mid-term elections, November 2006.
But it was business as usual. A year later the Senate voted
another $850 billion increase in the U.S. debt ceiling, increasing
it to almost $10 trillion. Gold had begun the month at $672;
that day it traded at about $740.
It has kept climbing ever since except for a short period
during the mortgage meltdown, when hedge funds and other institutions
sold everything in sight to raise cash for a flood of redemptions.
But even that was a short-lived reversal as gold prices soon
resumed their march over $1,000 to the drumming of national
debt increases. Meanwhile, oil, about $35 a barrel when Bush
was inaugurated, has more than doubled.
The rest of the world sees America's exploding debt and
wonders why anyone would want to continue trusting the U.S.
dollar or continue holding U.S. dollars as reserves. And in
fact, they are losing trust in the dollar. As crude oil has
flirted with $80 a barrel – even during a period of
"weak" global energy demand – it should be
noted that the Gulf Co-operation Council monetary union agreement
was recently ratified by Saudi Arabia, Kuwait, Bahrain and
Qatar. It is a major step toward the establishment of a Gulf
central bank and joint currency that could be pegged against
something other than the dollar. Similar steps reflecting
dollar skepticism are being taken elsewhere around the world.
In November the central bank of India chose to substantially
dis-hoard its dollar reserves, buying 200 metric tons of gold
instead. Russia recently began to reduce its dollar exposure,
diversifying its reserves into Canadian currency and securities.
There may be no better gauge of Washington's fiscal irresponsibility
than the statutory national debt ceiling. It is something
everybody can understand: Congress passes a bill, which is
signed by the president, allowing them to spend even more
money and to take the country deeper in debt. It is as though
a family could raise its Visa or MasterCard credit limit around
the dinner table. Of course, if a family were allowed to simply
print money to pay its bills, it probably could raise its
own credit-card debt limit!
That's where the Federal Reserve's monetary blow to the dollar
comes in – with a new four-year term for the enabler-in-chief
of Washington's spendthrifts – because the Fed can and
does print money, and it has done so exceedingly aggressively
under Bernanke's direction. It is foolish to think that the
explosion of the monetary base, which grew by 150 percent
during Bernanke's first term, can have done so without consequence.
The global price of gold is signaling that consequence, having
practically doubled during Bernanke's first term.
As U.S. debt heads toward $14 trillion, the Fed will do its
part, buying government bonds increasingly as others back
away, with money it creates out of thin air. It amounts to
a direct hit on the purchasing power of every dollar you own.
Don't be surprised when, as gold and oil prices have done,
consumer prices begin to take off. When a series of knockout
blows are clearly telegraphed, smart people see them coming
and do something about it.