Yesterday we wrote that the trend is your friend. We misspoke. To clarify, sometimes it’s your friend, sometimes not. It depends on the trend, the context, and the end result. When it comes to deficit spending in the government of these United States, we know the trend, we know the context; only the end result is in question. Even so, we have our suspicions of what financial fate may have in store for us, and so does everyone else. But they are only suspicions.
Before we pontificate on the matter of red ink (again), let’s identify the $781 billion in question. Indeed, there are so many billions earmarked for this and that in the halls of Congress these days that one can’t assume much when it comes to referencing large pots of money headed for a government spending program. It’s easy to get confused. As such, we’re talking of yesterday’s vote in the Senate to elevate the ceiling on federal debt by a cool $781 billion.
In some circles, $781 billion is a lot of money. How much is a lot? Seven-hundred-eighty-one billion buys a bit more than 39 billion copies of the paperback edition of Ben Graham’s Intelligent Investor, more than 24 million of this year’s Lexus ES300s model, and nearly 2.68 million homes at the average U.S. price in January, according to Census Bureau data. But when it comes to budgetary issues in Washington, $781 billion is a drop in the bucket. To be exact, $781 billion is less than 9% of total government debt, which rounds out to $9 trillion–that’s with a “t.”

Yes, Virginia, the debt ceiling needed to be raised. No question about it. Now’s not a good time to default. Then again, there’s never a good time for bouncing checks with the imprimatur of the world’s lone superpower. But being at the top of the geopolitical and economic heap doesn’t suffice for some who are frightened by $781 billion. “Somebody needs to stand up and say, ‘Stop me before I spend again,’ ” said Pat Toomey via The Globe & Mail. Toomey heads up the Club for Growth, which advocates small-government and even smaller doses of red ink.
U.S. Comptroller General David Walker seems to agree, going so far as to charge that even Wall Street is remaining a bit too cool for comfort these days. “The business community was very engaged in the deficit debate in the late `80s and early `90s, and now they’re largely missing in action, and that’s got to change,” Walker tells Bloomberg News. “If we don’t end up doing things differently, ultimately they’re going to pay a price, too, either through higher interest rates or through slower revenues or higher taxes.”
But warnings don’t receive much attention is the world of finance. Indeed, there’s scant fallout from deficits. The bond market, for one, doesn’t seem overly concerned. The yield on the 10-year Treasury Note is lower today than in 2000, when the government coffers were securely in the black vs. the budget-deficit and deficit-spending aura that dominate government finances in the here and now.
For those who are skeptical, be forewarned that you could hurt yourself looking for an obvious connection between the stated rate of inflation and the price of money. Ditto in the pricing of the dollar relative to the major paper alternatives dispensed by central banks around the world. The U.S. Dollar Index has shown an inclination to rise in recent history, belying the warnings that some have eagerly thrown around. Pessimism these days just doesn’t carry any weight in the empirical results as determined by Mr. Market.
In fact, optimism has its sources. The Congressional Budget Office’s latest baseline projection of the federal budget deficit predicts that the current $318 billion of red ink will fade in coming years, turning into a small surplus in 2012. In short, don’t worry, be happy, buy bonds and keep the faith, otherwise known as every fiat currency’s favorite emotion.
But the pessimists are digging in their collective heels just the same. We know because the goldbugs aren’t selling their preferred monetary alternative. An ounce of gold changes hands at nearly $555, or near its highest levels in a generation.
Maybe the goldbugs are wrong. Then again, maybe the government’s red ink isn’t going away, and maybe the deficit spending will come at a price after all. We don’t know, and neither does anyone else if one fast forwards five or ten years down the road.
You can choose to embrace the best of all possible outcomes as a strategic proposition, or you can wonder if unexpected things can happen. Every investor has a choice, and that includes spreading one’s portfolio across multiple assets. The government has choices as well, and that includes spending and defending its fiat currency. Meanwhile, there’s only one future. The question is: which one are you expecting, and when?