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For hedge against recession: Go gold

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Saturday, Dec. 29, 2012, 8:04 p.m.
 

The Republican-controlled House plans to reconvene Sunday evening as the federal government appears ready to plunge off the “fiscal cliff.”

Whatever solution transpires, it will not be enough to reduce the national deficit to a sustainable level. Therefore, taxes will rise for far more people than just the so-called rich.

As a result, recession is increasingly likely. What can Americans do to protect against the ravages of a recession?

Senate Majority Leader Harry Reid, a Nevada Democrat, declared on Dec. 18: “Now is the time to show leadership, not kick the can down the road.” Clearly, it was a calculated political remark in the potential blame game surrounding the failure of negotiations to reach a solution. Intended or not, his comment contains a strong element of truth.

The central issue facing the Obama administration and Congress is the huge deficit from entitlement spending, not the fiscal cliff. Clearly, the deficit is unsustainable and acutely embarrassing and dangerous for America.

At best, the fiscal cliff negotiations may achieve a deficit reduction of $4 trillion over 10 years at the price of substantial tax increases and cuts in spending. However, at the current rate, the cumulative deficit will have increased by $12 trillion in that decade, leaving a net increase, after slashing measures, of $8 trillion. This will take total Treasury debt to a staggering $23 trillion, raising the specter of savage credit downgrades and exorbitant interest rates to enable funding.

Senator Reid is correct on this point: The situation demands leadership of the highest quality.

Cutting entitlements like Social Security and Medicare is a political nightmare. President Obama's health care reforms are set to increase health costs dramatically. The temptation for even strong and well-intentioned politicians will be to shun cuts and increase taxes greatly, which is recessionary.

It is unlikely that entitlements, particularly those relating to health care, will be cut far enough to balance the budget. This lends support to the argument that, despite protestations to the contrary, Obama intends to go over the fiscal cliff. It will offer him more tax revenue than a negotiated solution and grounds to blame the Republicans.

Even if a negotiated solution to the fiscal cliff crisis is achieved, it will result in recession. An economically balanced solution to the far more threatening “entitlement cliff” likely will result in a deep recession, debasement of our currency and protectionism. In sum, it could drive the world toward a depression.

Investors who failed to see this threat and purchased gold are selling, eroding the price. As the specter of recession deepens, gold and other precious metals prices and investments will likely suffer further.

However, gold is purchased also as insurance against catastrophe. Does this justify the continued holding of the metal?

The chances of monetary catastrophe are increasing while the price of gold insurance is falling. Perhaps individuals should follow central banks in continuing to buy precious metals.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at johnbrowne70@yahoo.com.

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