One of the jokes making the post-election rounds this year is recycled from the Cold War era. “Americans complain because it takes so long to get the final result from their elections,” says a Russian. “In my country, we know our results months in advance!”
So, a lot of candidate victory parties were delayed. But even with a Senate runoff in a few weeks and expected demands for recounts, protests by disaffected voters, and a flurry of litigation over ballot handling, we know enough about the election results to say a few things about the economy and the markets.
We don’t mind noting that the first business of politics is politics. The partisan divide will prove much more important to Washington than the long-term solvency of the U.S. Trump’s legal troubles are racing his way, and House Republican will make sure to use their subpoena power to investigate the Bidens. Much more energy and media attention will go into both than into the nation’s spending and debt calamity.
Heading into the election, the generic “right track/wrong track” polls found 70% of Americans believed the country was on the wrong track. As bad as that looked for the Democrats, who hold the White House, the Senate, and the House, voter dissatisfaction did not produce the widely expected Republican victories. It was predicted in some quarters that such a “red wave” would cool off red-hot gold bullion demand, at least for a while.
But that did not happen. Bullion’s verdict on the election was bullish. Demand kept chugging right along as gold and silver surged higher in the days after the vote. Concerned about their savings and retirement, gold and silver investors just keep on buying.
In Washington, the government’s statutory debt ceiling is on the agenda. We can say with perfect assurance that the federal debt ceiling will be raised.
You have probably noticed that Congress carefully planned for the next vote on the debt ceiling to take place after the midterms so that it would not become an issue in the election. Now, with seven weeks until the start of the new Congress, it will be interesting to see if there is a rush to raise the ceiling in the lame-duck session. If not, it will mean that the leadership in both parties have taken the temperature of the incoming members and are not concerned about meaningful resistance to the debt ceiling hike.
Compounding debt and rising interest rates are a toxic mix that will drive inflation and gold prices in any case. With the federal government in perpetual debt, rising interest payments must ultimately mean more Federal Reserve intervention in the already stressed Treasury market (Fed intervention in the Treasury market is another way of saying inflation).
The government borrowed $1.4 trillion to finance the deficit in fiscal year (FY) 2022. It spent more than $500 billion on debt interest payments in FY 2022. By most calculations, each one percent increase in interest rates above expected levels will cost the government $240 billion more each year in debt service.
All of this makes the U.S. a credit risk in the eyes of foreign creditors, and foreign central banks can be expected to continue reducing their dollar reserves in favor of gold reserves.
Extending the Trump tax cuts will be on the agenda for Republicans, but that is down the road. In the meantime, House Republican strength will be insufficient to override a presidential veto. Indeed, with razor-thin control of the House, Republican initiatives on Capitol Hill will be mostly for show, wedge issues to force their opponents to oppose populist measures.
But a divided Congress is not enough to reign in government spending. Anything both parties are in favor of spending money on gets appropriated. Even worse, along the way, spending bills get larded up with even more pork to round up cross-aisle and stray votes for passage.
What are both parties in favor of? They are both for more military spending and supporting the U.S. global military empire. They are in favor of taking hard lines with foes like China, Russia, and Iran, and even with friendlies in Europe who question costly U.S. sanctions regimes.
Long experience teaches that no matter the rhetoric, when it matters, both parties are in favor of letting the Fed bailout and subsidize large and powerful corporations and industries that find themselves troubled in today’s economic turmoil. As the country moves into a recession, it will mean expansive monetary policy even as the Fed’s public posture is for tightening (and expansive monetary policy is also another way of saying inflation).
Speaking of recessions, along the way, and perhaps overshadowed in part by the election, are financial fundamentals that are dry tinder for a recession. How and where the collapse of the mega-crypto platform FTX will cascade beyond FTX remains to be seen, but it will slam a million creditors. Meanwhile, Big Tech is watching jobs disappear by the tens of thousands, which will have its own follow-on effects. And then there are the banks. Credit Suisse faced a reported $8 billion capital shortfall. We wonder about other banks and how many have borrowed short-term money to make long-term loans. Nothing is deadlier in a rising interest rate environment.
In his post-mortem on the midterm election, former congressman and presidential candidate Ron Paul said that the “failure of the welfare-warfare state to deliver peace and property—and the failure of the Federal Reserve to fulfill its mandate of ensuring stable prices and low unemployment”—means an inevitable economic meltdown.
“This meltdown will be precipitated by a collapse in the dollar’s value and the rejection of the dollar’s world reserve currency status,” said Dr. Paul. “It will bring the end of the welfare-warfare state and the fiat money system.”
All in all, the economic picture after the election is no better than it was before. It is not a period one would choose, but if we must go through it, at least we can protect ourselves with gold, which always shows up at crossroads like this.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.
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