Saturday, May 22, 2010

Aftermath Of The Great debate

In this week's Financial Sense Newshour podcast, the first segment had a lot on gold - but that's because of the public reaction to last week's "Great Gold Debate," on whether or not the gold price is manipulated. [.mp3 file of it here, if you need it.] More than a third of that more recent segment [.mp3 file], at the end, was devoted to reactions to each side. One of the callers used the word passionate, which was the right word to describe GATA's Bill Murphy. He carried the day with those who respected his passion, as well as with the disaffected. Those more dispassionate, as well as the image-conscious, tended to favour Jeffrey Christian. There was at least one caller who thought Jim Puplava was unfair to Murphy, which I don't believe was the case.

Also on, just before the Q-calls, was Ron Greiss of The Chart Store. He raised the possibility of gold entering into a bullish cup-and-handle formation, which may lead to the metal going back up again once the present difficulties are hurdled over. Mindful of the seasonality factor, Puplava suggested that gold may be in the doldrums until June.


The third segment features an interview with one of FSN's more colourful guests. Martin L. Gross is a bestselling author who thinks that the fisc has gone to a rather sulphrous place, and he has some choice words to describe politics as usual in today's D.C. The title of his interview, which has been placed early in the segment [.mp3 file], gives a good indication of what his words are: "When Racketeering Is Legal."

Here's an important point relating to the $100 trillion in unfunded liabilites the U.S. government has assumed: as of now, total U.S. household wealth is somewhere in the neighbourhood of $60 trillion. Since corporations are owned, this figure captures corporate wealth as well - more specifically, that part of it owned by members of U.S. households. Here's the jaw-dropper: if the U.S. government instituted a 100% wealth tax, its shortfall would still be in the neighbourhood of $40 trillion. Yes, if total 100% expropriation could somehow be enacted, the U.S. goverment still couldn't fully fund all its unfunded liabilities.

Now here's an interesting legal decision that's made all the difference in the world to U.S. Treasury debt: a court once ruled that a future entitlement commitment is not an asset. Unlike a whole-life insurance policy, it's impermissible for someone to borrow using future Social Security payments as collateral. It can be done with a whole-life policy, which is an asset of the policyholder.

If the decision had gone the other way, GAAP would require the U.S. government to record those "assets" as firm, real liabilities. By extension, Medicare would be a firm liability too. Had it not been for that judge, unless it could be demonstrated that U.S. government property has a value of $40 trillion or more, GAAP rules would officially declare the U.S. government insolvent. That's right: under GAAP terms, Uncle Sam would be a walking bankrupt. Imagine Moody's twisting words around to justify not slapping a C-Ccc rating on long term T-bonds.

It's amazing how a seemingly quotidian legal decision makes the difference between Aaa and Ccc.

Thanks to that decision, the U.S. government has the right to do the as-now politically unthinkable: slash entitlement spending without being held in breach of contract. The way the numbers work out, a future Congress will need that right.

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