richard russell

August 7, 2003

Laura Tyson's article in the August 11 Business Week. Ms. Tyson, who's dean of the prestigious London Business School, notes that when George W. Bush took office the federal government forecast a 10-year government surplus of $5.6 trillion. Now via tax cuts, Iraq, what have you, a growing number of private forecasters are projecting a 10-year budget shortfall of $4 trillion -- $6.7 trillion if you exclude the Social Security surplus.

Writes Tyson, "In 2003 total federal revenues as a share of the economy will fall to their lowest level since the end of the Eisenhower Administration. Federal income tax revenues as a share of the economy will fall to levels not experienced since 1943, when programs such as Medicaid and Medicare didn't even exist. One out of every three dollars that the government now spends outside the self-funded Social Security system must currently be financed by borrowing. This is the largest share of the deficit-financed spending in the last 50 years.

"If the deficits hit $400 billion in 2008, as many analysts predict, and if Social Security, Medicare, defense, and interest payments on the debt are spared the budgetary axe, government spending on everything else -- from education to homeland security -- would have to be slashed by 80% to restore budgetary balance. Unless some of the tax cuts are rescinded, the nation will encounter a grim choice between large deficits and lower living standards on the one hand or deep cuts in Medicare and Social Security -- just as baby boomers begin to retire."

Bad enough. Now let's turn to an article from the August 2 Economist. They're talking about a seminal study by the American Enterprise Institute authored by Jagadeesch Gokhale and Kent Smetters. These two economists measured the bill that those of us who are alive today are handing to the next generation.

Writes the Economist -- "The results are staggering. The authors estimate that the money the government promises to spend outstrips the taxes it can expect to collect by $44 trillion -- 20 times today's federal budget, and more than four times America's GDP. Their estimate of the GI (generational imbalance) is also enormous. Medicare (a health care program for old people) alone represents a net transfer of more than $20 trillion from future generations to those now alive.

"Like any private company teetering on the verse of insolvency, the American government must either find more revenue or cut spending. And the sooner the better, not just because it is unfair to hand the bill for today's spending to future generations, but because the later the changes are made, the bigger they need to be. Mr. Gokhale and Mr. Smetters calculate that waiting until 2008 to repair the imbalance will turn the $44 trillion into $54 trillion."

Russell Comment -- It's obvious that somewhere ahead, and probably soon, the US will be forced to make some incredibly difficult choices. Bring in a lot more revenue or cut critical spending. Of course, there's a third way that the economists and politicians don't like to talk about. It's called paying the bills with fiat paper -- or inflation. My guess is that this is the way a lot of the bills will be paid. If so, the dollar is headed for "junk currency" status.

For all the above reasons, I believe that subscribers must hold gold and gold shares. It may be a rough ride over the near term, I really don't know. The Fed and the politicians will try to hide the truth from the American people. Gold or real money is "the truth." If gold starts running wild on the upside, people will start asking questions. The news will be reported in Newsweek and Time and even in the Wall Street Journal and in Barron's.

In any event, this is the picture that I see ahead. The US is forced to either raise taxes sky-high (politically and economically almost impossible), cut programs like Social Security, Medicare and even defense to the bone (politically impossible) or print the dollars required to finance the liabilities (can they print that much without destroying the currency?).

I don't have the answer. I never ran up the bills in the first place, and I don't know how to pay them in the second place.


Richard Russell’s Dow Theory Letters