In announcing that Ben Bernanke would be reappointed to a second four-year term as Federal Reserve chairman, the White House admitted that the US debt situation continues to worsen. The Congressional Budget Office (CBO) says the US debt outlook is worse than what the White House says.

The White House projected that over the next ten years the budget deficit would be $2 trillion more than previously projected. Critics had loudly condemned the earlier projections as “rosy.” “Out of touch with economic reality,” some said. The critics have been validated.

The CBO now says the ten-year projection for the deficit is $7.14 trillion, some $2 trillion more than projected as recently as March. It seems that every time new deteriorating economic statistics are evaluated, the economy looks even more bleak and the deficit projection looks even bigger. Can any of the numbers be relied on? Probably not.

It was only six months ago that the White House and the CBO numbers were some $2 trillion lower. What will be the ten-year projection in another six months?

The CBO’s $7.14 trillion projection assumes no changes in Obama administration policies. If the administration’s fiscal plans are allowed for, the CBO’s ten-year deficit projection swells to more than $10 trillion. Historically, the CBO has produced more accurate predictions than the White House. White House predictions nearly always are politically tainted regardless of what party holds the presidency.

The White House expects that economy to shrink by 2.8% this year compared with its earlier estimate of 1.2%. It also expects unemployment to exceed 10% and to stay higher than 8% until the end of 2011. The White House and the CBO see this year’s budget deficit at around $1.6 trillion, which probably will be right considering that this fiscal year ends September 30.

From yesterday’s lows to today’s highs (as this is written), in less than twenty-four hours, price of gold climbed $65 and the price of silver $1.20. Considering yesterday’s announcement by the Fed, one has to wonder why the moves were not bigger. Here’s a snippet from a Bloomberg release:

To provide greater support to mortgage lending and housing markets, the committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage- backed securities, the Federal Open Market Committee said in a statement in Washington today. Moreover, to help improve conditions in private credit markets, the committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

When the Fed says it is going to “increase the size” of its balance sheet, that means it is going to print money, plain and simple. If things go as the Fed said, in about six months there will be an additional $1,050,000,000 in circulation. And, that’s from this announcement alone. It does not necessarily take into consideration other spending associated with the ongoing bailouts and already committed to fiscal “stimulus plans.”

Meanwhile, other central banks are following the Fed’s lead. From the Bloomberg release:

The Bank of England is buying government bonds and corporate debt, the Bank of Japan is snapping up government notes and making subordinated loans to banks, and the Swiss National Bank is intervening to weaken the franc.

The world’s central banks have just taken giant steps toward hyperinflation, which I’ve commented on several times since starting this blog. See the following posts.

The seeds of hyperinflation

The Insolvency of the Fed

Is hyperinflation a possibility for the US?

The sad history of paper money

For still another discussion about the printing of paper money and inflation, see my March 2005 article Abandoned Gold Standard Guarantees Inflation.

Gold and silver remain the only monies that are not being inflated. Hold on to your seats. This is going to be a wild ride.

Back on July 24, 2008, I penned a post titled The Sad History of Paper Money, in which I noted that money not redeemable in either gold or silver is printed until it is worthless. Now mises.org has posted an article titled The Insolvency of the Fed that starts Since August 15, 1971 the US dollar has been an irredeemable paper currency. Every irredeemable paper currency in history has failed. The people at mises.org know as much about money (the history of money, what money is and what it should be) as anyone around, and their writings are important looks at today’s monetary situation. 

The article is an excellent educational piece for investors trying to get better understandings of just what the Fed (and the fedgov) is attempting to achieve in the bailout of the banking industry. More important, the article explains why the Fed is headed toward insolvency, something that the average person thinks is impossible.

The article also provides insight into the workings of the Fed. As you might guess, the authors are not fans of the Fed, and they lead readers to understand why they titled the piece The Insolvency of the Fed.

The article notes that because of the banking crisis the Fed now holds lower quality assets. (There was a time when the Fed was restricted to buying only U.S. treasuries.) Not wanting to increase its balance sheet (increase its total assets), the Fed started the bank industry bailout by trading U.S. treasuries for bad assets held by troubled banks. The banks got the good assets; the Fed got the failed (or failing) assets.

With Fed valuing both assets the same, the Fed’s balance sheet was unchanged. But, as the crises worsened, the Fed had to “increase its holdings,” which means that it began printing money to buy bad assets from the banks. And, things look to get worse.

But what new assets is the Fed acquiring? The Fed has already started buying the debts of Fannie Mae, Freddie Mae, and the Federal Home Loan Banks. It has also bought mortgage-backed securities issued by Fannie Mae, Ginnie Mae, and Freddie Mac. Bernanke is also considering buying other securities backed by consumer loans, credit card loans, or student loans.

The authors joke about the Fed trading gold for Zimbabwean dollars. If you aren’t familiar with the Zimbabwean dollars, I commented on them in my January 20 post Is hyperinflation a possibility for the U.S.? Investing in gold has never deserved more serious consideration.

Just in case you missed it, Congressman Ron Paul has introduced a bill calling for the dismantling of the Fed.

As this is written, gold is trading at about $924 and silver $16.60, posting decades-high prices. Meanwhile, the dollar is suffering on the FOREX markets. Much of the blame for the dollar’s woes, and the reason for the metals’ climbs, is laid at the feet of the subprime lenders, the subprime mess having been spread worldwide and affecting financial institutions across the globe. The Fed slashing its discount rate three quarters of a point Tuesday showed just how bad the world’s financial and economic “experts” think things are. Still, the subprime mess is not the sole cause of the dollar’s woes; lewrockwell.com has posted a commentary as to why.

How to Sink America combines Tom Engelhard’s and Chalmers Johnson’s analyses as to the stress put on America by the U.S. military. Now, I’m well aware that any suggestion that military spending be cut is a sensitive subject with many people. However, all the military spending is not desired by the Pentagon.

For example, Engelhard notes that the Pentagon wanted to cancel an order for Boeing’s C-17 cargo plane. But, canceling a project is not that simple because contracts and subcontracts for weapons systems are passed out to as many states as possible, which means jobs. So, Congress balked at the Pentagon’s plans to cancel its order for C-17s. The result of such politics is that the Pentagon ends up with material it does not want.

Chalmers Johnson’s part of the analysis is titled Going Bankrupt: Why the Debt Crisis Is Now the Greatest Threat to the American Republic. The title alone should cause one to want to read it, especially anyone interested in investing in silver and gold. Here are a few excerpts from Johnson’s analysis:

It is virtually impossible to overstate the profligacy of what our government spends on the military. The Department of Defense’s planned expenditures for fiscal year 2008 are larger than all other nations’ military budgets combined. The supplementary budget to pay for the current wars in Iraq and Afghanistan, not part of the official defense budget, is itself larger than the combined military budgets of Russia and China. Defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history.

Leaving out of account President Bush’s two on-going wars, defense spending has doubled since the mid-1990s. The defense budget for fiscal 2008 is the largest since World War II.

And:

In an attempt to disguise the true size of the American military empire, the government has long hidden major military-related expenditures in departments other than Defense. For example, $23.4 billion for the Department of Energy goes toward developing and maintaining nuclear warheads; and $25.3 billion in the Department of State budget is spent on foreign military assistance (primarily for Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United Arab Republic, Egypt, and Pakistan). Another $1.03 billion outside the official Department of Defense budget is now needed for recruitment and reenlistment incentives for the overstretched U.S. military itself, up from a mere $174 million in 2003, the year the war in Iraq began. The Department of Veterans Affairs currently gets at least $75.7 billion, 50% of which goes for the long-term care of the grievously injured among the at least 28,870 soldiers so far wounded in Iraq and another 1,708 in Afghanistan. The amount is universally derided as inadequate. Another $46.4 billion goes to the Department of Homeland Security.

In short, there simply is not enough money to sustain the U.S. military and the rest of the federal government’s spending. Raising taxes is not a solution because it usually results in politicians being voted out of office. Besides, presently Congress and the White House are compromising on a plan to send “tax rebates” in an effort to stimulate the economy. Deficit spending is on the horizon for as far as the eye can see. These are the times to invest in gold and silver.

Most gold and silver investors are drawn to the metals because of concerns about the dollar. But, do most gold and silver investors know just how bad the financial situation really is for the United States government? Probably not, says David Walker, the Comptroller General of the United States and head of the General Accountability Office, commonly called the GAO.

The GAO has the responsibility for auditing and investigating “all matters relating to the receipt, disbursement, and application of” federal funds. The GAO has the authority to audit any government agency and the responsibility to report those findings to Congress. Because the Comptroller General is appointed for fifteen years, he cannot be replaced by either incoming presidents or by Congress if it does not like his reports.

Despite the GAO’s awesome responsibility, few Americans even know that the agency exists. And, unfortunately, most that do know about the GAO probably treat it with the same disrespect that they hold for other government agencies. That would be a mistake for the GAO is the one creditable federal agency.

So, how bad is the fiscal state of affairs for the federal government? David Walker says that “the most serious threat to United States is not someone hiding in a cave in Afghanistan or Pakistan but is our own fiscal irresponsibility.”

Here is a link to a 10-minute 41-second YouTube video about David Walker’s efforts to inform the American people about the precarious financial state of affairs of the federal government. The last four minutes show Congressman Ron Paul lecturing Fed Head Ben Bernanke about the immorality of the Federal Reserve. (Ron Paul is probably the only member of Congress who recognizes that the Fed is truly an immoral institution.)

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