Gold went bonkers last week – strange when you consider it was on the back of a major power shift in Washington. Aren’t the Republicans running on a deficit reduction platform? Gold certainly doesn’t buy into that idea or promise, and neither should you. If you want to know whose calling the shots on policy don’t look to either party, look to the Chairman of the Federal Reserve – Bubble Ben.

Last week he threw more money into the system, $600 billion more, just to make sure that interest rates would stay low, the dollar would plunge some more and a new bubble in asset prices (except for your home of course) would start inflating. Gold is not a commodity like silver or sugar my friends. It is a currency that has not obligation. It just is. And, it’s not signaling good times ahead. People often look to it as an inflation hedge, but in reality gold has little correlation to inflation. It’s correlated to money supply and currency devaluation. Sure, it rose during the inflationary times of the 70s and 80s, but that price move was more coincidental than correlated. It was freed from its shackles in 1973 and has risen ever since, inflation or not.

The US dollar meanwhile has done nothing but depreciate. Up until about 15 years ago, the US dollar was losing about 1% per year in value since the early part of the 20^th century. By the mid nineties the same dollar that was worth one dollar in the 20s was worth a whopping 3 cents or thereabouts. Worse, since the 90s the dollar’s decline has actually accelerated. We are now losing about 2.5% per year against the dollar index. And, gold is rising. Take note of any pullbacks and buy…as we have been suggesting for quite some time now.

The California Project

California is arguably the most beautiful State in the Union. After-all 38 million people don’t live there because it has a government that understands how to govern. California is important because it tends to lead the rest of the country when it comes to trend setting. For fashionista’s that might be good news, but for those of us who worry about the fiscal direction of the country, it is disastrous at best.

California is facing a budget deficit of more than $138 billion. It is for all intents and purposes bankrupt, similar to the United States as a whole. That is not the news. The news is what the state is doing about its situation. It has embarked on a massive stealth taxing strategy using the claw back method. I spoke to an attorney friend of mine who practices out of La Jolla. I asked him how life was. He said that he has precious little time anymore. Between business and the government, he has no life left. Apparently he just got notice from Sacramento that the state wanted business records dating back to 2007 of any and all “sales” he made to persons and entities out of state so that they could collect sales tax on those sales. When you need money, you will find all sorts of loopholes to collect it, even if that means going back in time and enacting retroactive legislation.

The US is in dire straits. Government revenue collection is nowhere near spending. The government faces two choices. Either they can decrease spending – the new Republican platform…or they can increase taxes…the old Democrat platform. The question is which on makes more sense and which one is easier to put forward. Of course, it makes more sense to cut spending and government. But, when has government ever made sense. Other than a few flashes of common sense over the past three decades (Welfare Reform being the biggest) the path of least resistance is always to raise taxes. No matter what you’re hearing out of Washington today, you can bet your bottom dollar that a bigger part of that bottom dollar is headed to DC in the very near future. Even if the Republicans succeed in cutting spending, and I certainly hope they do, their lofty ambitions, according to their own recent pronouncements is to cut about $100 billion in spending. Wow! Really! A WHOLE hundred billion. I guess many would argue that you have to start somewhere. That $100 billion is about 8% of the ANNUAL deficit and barely a footnote on the National Debt. So, you can see where this is going. Either the country’s standard of living and currency is going to face a more severe decline as spending continues unabated…or smarter heads will prevail in Washington and we will slash spending by hundreds of billions…my bet, unfortunately is on the former and not the latter.

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The Winner Is….

If there was ever a midterm election the opposition did not want to win, it was the one held last Tuesday. Nothing quite like having to actually live up to a platform. The Republicans took over the House and now they have some power again. How can they use it? Well, not being in control of the Senate or the Whitehouse, the best they can really do is say NO loudly and derail some bills. That is a start. But, can they push through new legislation or even repeal existing legislation? NO.

The result is a bunch of lame ducks all around and gridlock in Congress. Maybe that is a good thing since it could slow government growth to a trickle for a couple of years. Unfortunately, now the Republicans are going to have no one to blame if the country continues is downward trajectory. Sometimes winning just isn’t all it’s cut to be.

Best regards

Kevin Raymond