The article below was written after a conversation with Claudio Grass of Global Gold regarding the recent US government shutdown and its implications. It has  originally appeared at Gold Silver Worlds, the blog associated with Global Gold.

We have discussed the topic in different form in these pages before, this article  summarizes our thoughts on the topic.


Political Grandstanding and the Dreaded 'Shutdown'

There have been 18 so-called 'government shutdowns' in the US in the past four decades, including the current one. Some were of very short duration, lasting only a day or two, a few lasted much longer (the record was the 21 day event in 1995). These shutdowns tend to happen fairly regularly when the administration is in cohabitation with a Congressional majority in the hands of the opposition party.

For instance, if the Congressional majority is Republican and the president a Democrat as is the case at the moment, the Republicans will suddenly pretend to rediscover their inner fiscal conservative. Republican administrations backed by a Republican Congress are well known for spending money like drunken sailors, so this is really only pretense. The grandstanding is designed to pull the wool over the public's eyes: see, there are finally a few principled politicians making a stand on reducing the public debt!

That is of course nonsense. What the grandstanding and prancing about before the media is all about is only one thing: the question of how the loot is going to be divided and whose pet projects will get the most funding. It is essentially similar to elections in this regard: part of an auction of stolen goods. No-one wants to actually reduce overall spending or the public debt mountain (there are always a few exceptions to the rule of course, but you can count those on the fingers of one hand).


However, one does learn a few interesting things during these 'shutdowns'. For instance, 'non-essential government employees' are sent on unpaid vacation. This immediately raises a question though: if they are 'non-essential', why do they even exist? Once one is apprised of some of the details, it becomes even more obvious that there is something odd about these 'non-essential' jobs. Why are government employees operating ferries to the statue of liberty or selling tickets to national parks visitors? Even if one erroneously believes that such things as 'public goods' exist (i.e., goods for which there is a demand, but which the market allegedly cannot or will not provide) one should recognize that these things cannot be part of such a category of goods, however broadly it is conceived.

The shutdown is therefore a salutary event, if only because it might get some people to ask questions they haven't pondered before. As Murray Rothbard noted on occasion of the 1990 shutdown (from 'making Economic Sense' – the entire article can be seen here):


“In politics fall, not spring, is the silly season. How many times have we seen the farce: the crises deadline in October, the budget “summit” between the Executive and Congress, and the piteous wails of liberals and centrists that those wonderful, hard-working, dedicated “federal workers” may be “furloughed,” which unfortunately does not mean that they are thrown on the beach to find their way in the productive private sector.

The dread furlough means that for a few days or so, the oppressed taxpaying public gets to keep a bit more of its own money, while the federal workers get a rare chance to apply their dedication without mulcting the taxpayers: an opportunity that these bureaucrats invariably seem to pass up.

Has it occurred to many citizens that, for the few blessed days of federal shutdown, the world does not come to an end? That the stars remain in their courses, and everyone goes about their daily life as before?


The 1990 furlough crisis highlights some suggestive but neglected aspects of common thinking about the budget. In the first place, all parties are talking about “fair sharing of the pain,” of the “necessity to inflict pain,” etc. How come that government, and only government, is regularly associated with a systematic infliction of pain?

In contemplating the activities of Sony or Proctor and Gamble or countless other private firms, do we ask ourselves how much pain they propose to inflict upon us in the coming year? Why is it that government, and only government, is regularly coupled with pain: like ham-and-eggs, or . . . death-and-taxes? Perhaps we should begin to ask ourselves why government and pain are Gemini twins, and whether we really need an institution that consists of a massive engine for the imposition and administration of pain and suffering. Is there no better way to run our affairs?”


(emphasis added)

Indeed, the world will not end because of such a shutdown – on the contrary, it is a great opportunity to observe how many of the functions government has arrogated to itself are indeed redundant. As an aside, it was widely reported that the Republicans tied the question of whether to pass a budget resolution to the 'defunding' of the Obamacare Act. This is an example of Orwellian language. The alleged 'defunding' would not have 'defunded' a penny; it was merely about a few points of implementation. Specifically this particular point:


“Obama and Democratic congressional leaders demanded that Boehner allow a vote on a straightforward Senate bill to fund the government through Nov. 15. Under pressure from conservatives insisting he draw a hard line, Boehner refused.

Before that, the Senate rejected a House amendment delaying the entire healthcare law for a year, Boehner pushed through a second series of amendments to delay only the individual mandate and scrap subsidies in the law for members of Congress, their staff and political appointees.

Led by Reid, the Democratic majority in the upper chamber swatted down each House volley like a tennis player hovering at the net.”


So the major stumbling point that has led to the shutdown was the fact that the Democratic majority refused to give up the special privileges that allow members of Congress – contrary to all other citizens of the US –  to 'opt out' from the Obamacare legislation's more onerous provisions. They will be able to save a lot of money that way.


The Debt Ceiling

Since the current shutdown is tied in with the 'debt ceiling' debate, it provides an even wider canvas for deliberations about government finances. We don't necessarily want to discuss the embarrassing inanities uttered by members of the political class in this context, or even those purveyed in the media. Starved for anything interesting to report, they are blowing the event way out of proportion (their  pronouncements could hardly sound more apocalyptic if an asteroid were about to hit the earth).

Anyway, the president and his party (who naturally wish to see the debt ceiling increased sans conditions, i.e., they want to be free to continue to spend with both hands) have decided it is time to play the 'default scare card'. We should perhaps point out here that a 'ceiling' that keeps getting raised is not a 'ceiling' at all, so one wonders why it was created in the first place.

On the other hand, because the debt ceiling occasionally provides us with wholesome diversions such as government shutdowns, we must admit it is not an entirely useless piece of legislation. In fact, what we have here is a rara avis that successfully combines entertainment with education. One might call it an infotainment bill.

We are supposed to be in mortal dread over the prospect of a default. To wit, here is a recent press report announcing: “U.S. Treasury warns debt default could plunge America into worst recession since Great Depression.

What? Not again! Didn't we just emerge from the 'worst recession since the Great Depression'? And yet, here it is again, the Great Depression boogeyman.


“A U.S. government default caused by Congress failing to raise the $16.7 trillion federal debt limit could have catastrophic consequences that might last decades, the Treasury Department said in a report Thursday.

“Not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation,” the Treasury said in the report.

“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth — with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression,” the department said in the report.”


(emphasis added)

Of course this is complete nonsense as well. While it is true that a default by the US government would have grave repercussions – for instance, it may well end the dollar's dominance as the world's reserve currency, which is an extraordinary privilege enjoyed by the US – a failure to raise the debt ceiling won't lead to a default unless the treasury decides to default voluntarily.

The only thing that needs to be done to avoid a default is to merely stop deficit spending. The US treasury takes in some $2.4 trillion in tax revenue every year. That should give it plenty of scope to both continue pay interest on its existing debt as well as paying the principal on maturing debt (note that it can also issue new debt as long as it repays old debt and thereby remains within the limit imposed by the 'ceiling').

In fact, the only thing that would happen if the ceiling were not raised is that it would finally morph from the joke it currently is into an actual ceiling.

Of course this would also imply that there could be no more spending growth and that nearly all discretionary spending would have to be stopped. The government's size would shrink by about a third, to where it was – 10 years or so ago perhaps?

However, one thing that the recurring wrangle over raising the phony debt ceiling shows, is that there is absolutely no intention to ever reduce the debt mountain or – gasp! – actually repay the debt or even a portion of it. As Ludwig von Mises wrote about the nature of government debt (in 'Human Action')


“But if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure, the capital borrowed shrinks or disappear entirely, and no source is opened from which interest and principal could be paid. Then taxing the people is the only method available for complying with the articles of the credit contract. In asking taxes for such payments the government makes the citizens answerable for money squandered in the past. The taxes paid are not compensated by any present service rendered by the government's apparatus. The government pays interest on capital which has been consumed and no longer exists. The treasury is burdened with the unfortunate results of past policies.”


 (emphasis added)

Therefore, if any 'services' are to be rendered by the government once its existing debt burden exceeds a certain threshold, it will have to spend ever more – and this can only be done by either raising taxes, borrowing more funds or by means of monetary inflation. In reality, all three have been and continue to be resorted to by modern-day governments.

We often hear that government debt is required by financial institutions to render the service of 'safe collateral', but this 'safety' is an illusion. As Mises notes on this point (ibid):


“The long-term public and semipublic credit is a foreign and disturbing element in the structure of a market society. Its establishment was a futile attempt to go beyond the limits of human action and to create an orbit of security and eternity removed from the transitoriness and instability of earthly affairs. What an arrogant presumption to borrow and to lend money for ever and ever, to make contracts for eternity, to stipulate for all times to come!

In this respect it mattered little whether the loans were in a formal manner made irredeemable or not; intentionally and practically they were as a rule considered and dealt with as such. In the heyday of liberalism some Western nations really retired parts of their long-term debt by honest reimbursement. But for the most part new debts were only heaped upon old ones. The financial history of the last century shows a steady increase in the amount of public indebtedness.

Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms

 of the contract.”


(emphasis added)

Indeed, deep down nobody truly believes that these debts will ever be paid – and if they are paid, then likely only with money the purchasing power of which has steeply diminished. Essentially, government debt everywhere is a  Ponzi scheme: old creditors are paid off with funds received by new creditors  and the scheme continues to expand in size, seemingly inexorably. Here is a chart showing the US Federal debt. Since the year 2000, the US government has issued almost twice as much additional debt as it has issued in its entire history from 1776 to 2000. 



total federal debtUS federal debt has nearly tripled since the year 2000 – click to enlarge.



It is no coincidence that the true broad US money supply TMS-2 has risen by nearly 230% over the same time span. Here is a chart showing this monetary aggregate. Note the remarks we have added – if the growth rate in this monetary aggregate should slow down again, the Bernanke echo bubble will crash. The entire so-called 'recovery', such as it is, depends on this money supply inflation continuing at a steep rate:



US-TMS-2-since-1988-woUS money supply TMS-2 since 1988. Since the year 2000, the money supply has increased by nearly 230% – whenever the rate of increase merely slows down, asset markets and the economy tend to crash – click to enlarge.



One conclusion from this is that the authorities are now 'boxed in'. They have to continue to spend and inflate, otherwise the liquidation of malinvested capital the Fed has arrested with its money printing exercises will immediately resume. But can such a policy be continued forever and ever without any untoward consequences?

The answer to this question must be a resounding 'no'. Already the US banking system has begun to sharply reduce the issuance of inflationary credit, which is a sign that the economy is structurally so severely damaged that there is literally 'nothing left to lend'. In other words, if the banks were to issue additional credit from thin air – something they could in theory do – they would do so in the knowledge that this credit cannot ever be repaid, as  underlying economic activities are no longer able to support the addition of even more debt. In fact, it is to be questioned whether they can support the already existing outstanding debt. Too many credit bubbles have apparently consumed too much real capital. We may already be at the point of no return, where it is simply 'game over'.

And yet, total credit market debt outstanding continues to grow, as the government has stepped in to an extent exceeding any private sector deleveraging that may have occurred. In fact, only part of the private sector is actually reducing its debt load, namely households. Corporations, just like the government, keep going ever deeper into debt (which is putting their record high aggregate cash hoards into perspective. Note that neither the cash held by corporations nor the debt on balance sheets are evenly distributed; the aggregation of such numbers obscures more than it reveals).



Total credit market debt owedTotal US credit market debt owed continues to zoom to new record highs after a one year pause following the 2008 crisis – click to enlarge.



We strongly suspect that both government debt growth and money supply inflation will continue unabated – any pause will immediately bring about the kind of short term economic pain these policies have explicitly sought to prevent and will therefore be quickly reversed.

It is not unlike the situation the revolutionary assembly of France found itself in in the late 18th century: when it issued new money, industry seemed to revive. As soon as it stopped, industry slumped again. And so it was decided to issue ever more money, until the entire scheme blew up.

There can be little doubt that modern-day governments are on the road to a similar date with destiny – and lately the speed at which they travel toward it has increased markedly.



The gold market has been under pressure ever since it has begun to lose its 'euro crisis premium'. Nowadays nearly all the banks and brokers that turned bullish on gold when it rallied above $1,500 per ounce are fashionably bearish. Of course such analyses cannot help investors at all. Who needs an analyst who is turning bullish at $1,500 or 1,600 or 1,700 and then turns bearish at $1,400 or 1,300? Obviously one cannot make money with such advice.

However, these considerations are only relevant for traders. Longer term investors should not worry too much at what price gold trades from day to day or week to week. They buy gold because they must expect that government debt and monetary inflation will indeed continue on the path they have been on for quite some time now and that the above mentioned 'date with destiny' is very likely unavoidable.

Of course there is always a remote possibility that fiscal discipline and monetary policy rigor will make a comeback, but betting on such an outcome seems foolish. The incentives for politicians and bureaucrats are all firmly skewed in the opposite direction.

The current equanimity of markets and the enormous faith market participants apparently have in central banks and their ability to 'keep things under control' are likely to prove to be ephemeral phenomena. They are based on a comforting fantasy, as most people find other possibilities too ghastly to contemplate. That actually creates an opportunity to buy gold at a discount. On the day when this unbridled faith in central bankers crumbles, one will do well only if one already has one's insurance in hand, preferably safely stored where it is well outside the grasp of the bureaucratic and political classes.

As noted above, there is always an outside chance that this insurance won't be needed. The market economy, in spite of all the obstacles arrayed against it, continues to produce wealth. Not every investment is misguided, even though economic calculation is severely distorted by present-day policies. If the proper framework is put in place, the economy will thrive.

However, the chances that such insurance will indeed be needed seem greater today than ever. It matters little that Europe's crisis no longer dominates the headlines; what one must ask is: has anything changed? Nothing has – the mountain of public debt in Europe continues to grow. Japan is engaged in an extremely dubious monetary and fiscal experiment even while the size of its public debt hastens from record to record. Everybody knows this is unsustainable – the only question is when the day will come when the markets finally throw a fit and the unsustainable nature of this situation becomes glaringly obvious to all. It is unknowable at this time which of the many possibilities will provide the next crisis trigger – but it should be clear that things cannot simply continue along current lines for all eternity.

The choice is to either trust in fallible politicians and bureaucrats or in gold – we certainly know what we prefer. 



Charts by: Federal Reserve of Saint Louis Research



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One Response to “Government Shutdowns, the Debt Ceiling and Gold”

  • No6:

    “if the growth rate in this monetary aggregate should slow down again, the Bernanke echo bubble will crash”.


    Actually, the growth rate must remain exponential to prevent a liquidation ‘crash’, i.e. even if the growth rate of money supply remains the same the echo bubble will crash.

    (Notice how the slope of money supply growth has steepened in the chart post 2008.)

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