Thursday, October 1, 2009

End of the quarter and social security

The quarter ended yesterday with gold above $1000. This is actually a new high for the end of a quarter and the end of a month. I believe this to be yet another signal that gold is likely to move higher; I think that we will have a new high in the gold price in October, and will challenge $1200 by the end of the year. It will be interesting to see what happens to the price of gold once it breaks significantly above the 2008 highs. Will the increase be gradual? Will it inspire some frenzy buying and then crash? Will it trigger a larger shift in consciousness or sentiment about fiat money?
We will see, and I don't think there will be long to wait.

On a related front, there was a news item over the last weekend on social security that surprised me. Apparently the social security system will be paying out more than it is taking in the year 2010! Wow.

If you read through the article it says at some point:

"Social Security has accumulated surpluses from previous years totaling $2.5 trillion"

You have to have a finely developed sense of irony and Orwellian humor to fully grasp this surplus. This "surplus" is nothing more than US treasury bonds, meaning that the government borrowed this money to pay for other things and deposited treasury bonds (debt) in its place. Kind of hard to wrap your mind around isn't it?

The bottom line is this: there is no surplus. A true surplus would be represented by some store of value such as cash, ownership in productive capacity, crude oil reserves, gold, real estate, etc! Instead, any social security taxes that were in excess of social security payments (the surpluses) were borrowed by the government and spent somewhere else on something else. There is no direct or proportional way that this spending will be returned to the social security trust fund. Thus the surplus has already been spent.

What will happen now is that the US will have to go into debt that much faster because the social security will be in deficit each year instead of surplus. The fact that the "trust fund" will not run out until 2037 is largely irrelevant. The trust fund can only be turned into real goods to the extent that the government can increase real taxes on the American population. The rubber hits the road in 2010, because that is the year that social security is in deficit, and there is no surplus of real goods or cash sitting anywhere.

This is one of the three most important economic challenges facing America. The other two are expensive/constrained energy production, and the end result of a monetary system based on debt and paper.

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