Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

U.S. Budget Battles Ahead

Politics / Government Spending Aug 09, 2011 - 06:45 PM GMT

By: Axel_Merk


Best Financial Markets Analysis ArticleMy most recent Merk commentary, published July 25, was motivated by the possibility of an impasse on the federal debt ceiling. Now that President Obama has signed a bill raising the ceiling, I am motivated to write once again. Standard and Poor’s has registered its concern by lowering its long-term sovereign credit rating on the United States from AAA to AA+.

Now that the early August debt-ceiling issue is out of the way, everyone should understand that the country is only temporarily saved from continuing bitter controversy over budget issues. We will likely see impasse after impasse in the future. Moreover, the controversy and economic uncertainty may well be affecting the economy, leading to market fears of renewed recession.

Why did we go to the budget brink? Democrats assert, correctly, that Tea Party Republicans held the country hostage over the debt ceiling. However, as I noted in my previous commentary, it might be equally argued that President Obama was holding the country hostage over his demand that taxes be increased as part of the deal. Republicans and Democrats have competing views and each party is willing to go to the brink if it believes that it can prevail by bringing popular support to bear.

We have also gone to the brink—over it, actually—on a funding bill for the Federal Aviation Administration. Congress went off on its usual August vacation without resolving the matter, and thousands of workers on FAA-funded construction projects were put out of work for nearly two weeks. Congress came back into session briefly to extend the FAA authorization until mid September, but the underlying controversy has not been resolved. Similar issues will continue for years to come.

What are we to make of the situation? I am reminded of one of Beryl Sprinkel’s favorite observations. Beryl, raised on a farm in Missouri, liked to say that on the farm everyone knew how to get the attention of an ornery mule. “You hit the beast with a two by four.” Sprinkel, who died two years ago, served for many years as chief economist of Harris Trust in Chicago and later as Chairman of President Reagan’s Council of Economic Advisers. On the debt ceiling debate, the tea partiers pulled out the only two by four they had available, and took the country to the brink of default.

Obviously, there has to be a better way to proceed. There is, but the basic problem from my perspective, and that of many others, is that President Obama refuses to present a plan to deal with the deficit. The Budget he submitted this past February ignored the issue. That is not just my judgment and that of the editorial page of the Wall Street Journal. Here is the opening paragraph of the Washington Post editorial (February 15, 2011) the day after Obama submitted the budget:

    THE PRESIDENT PUNTED. Having been given the chance, the cover and the push by the fiscal commission he created to take bold steps to raise revenue and curb entitlement spending, President Obama, in his fiscal 2012 budget proposal, chose instead to duck. To duck, and to mask some of the ducking with the sort of budgetary gimmicks he once derided. "The fiscal realities we face require hard choices," the president said in his budget message. "A decade of deficits, compounded by the effects of the recession and the steps we had to take to break it, as well as the chronic failure to confront difficult decisions, has put us on an unsustainable course.” His budget would keep the country on that course.

The President’s unwillingness to offer specific proposals has much to do with the standoff and the poisoned atmosphere. In an op-ed in the WSJ on August 3, Congressman Paul Ryan focuses on the same issue. The op-ed headline is, “Where’s Your Budget, Mr. President?” For those interested in more detail on the budget issue, I strongly recommend the recent report by the Congressional Budget Office, “CBO’s 2011 Long-Term Budget Outlook.”

A major problem with the argument over taxes is that neither side is willing to be specific. Many observers—count me among them—believe that additional revenues will be needed to address the long-run budget problem. But I am not ready to sign off on President Obama’s plea for “balance” in the absence of comprehensive tax reform, which the country desperately needs. My expectation is that if the Republicans had accepted the President’s plea for more taxes in the interest of “balance,” then he would have been back in his budget early next year asking for more balance. Those who want more revenue need to be specific about how much more. And, most importantly, they need to accept the fact that the budget problem cannot be fixed through taxes alone. The major part of the work must be done on the spending side. Medicare, especially, must be reformed. It cannot survive in its current form.

Similarly, Republicans who want only to cut taxes need to be specific. There are essential functions of government that require revenues. Among these are certainly maintenance of an adequate military and domestic security. We need to finance a sound court system. It is not responsible to say “cut taxes” in response to every argument to increase taxes.

An Acid Test

Most arguments favoring federal spending seem implicitly to assume that someone else is or should foot the bill. For Democrats, “someone else” is the upper-income taxpayer. I propose the Social Security test instead.

I’ll illustrate my proposed test with the FAA bill mentioned earlier. One of the issues there is subsidies to airports in rural areas. Would you favor financing these subsidies by cutting Social Security payments to those currently on Social Security? Ask any member of Congress—even one living near an airport receiving the subsidies—and I am quite positive what the answer would be, if you could cut though the likely evasions.

I would apply the same test to subsidies for ethanol, for wind and solar power, for high-speed rail, for farm subsidies and a host of other programs. Indeed, I would apply this test to all federal spending. Speaking for myself, I would be willing to accept a cut in Social Security—my own Social Security—to pay wages for military personnel fighting abroad, for salaries for judges and FBI officers, and for other essential functions of the federal government.

Why do I make this argument to Merk investors? The reason is that clarity in our public debates will affect many outcomes as the country deals with the budget deficit. I hope that Republicans repeat at every opportunity, “What is your plan?” We must understand, as the CBO makes clear, that our budget problem cannot be solved by a tax increase confined to the top brackets. For tax increases to make a material contribution to solving the budget problem, the increases will have to apply to most brackets.

I would be delighted if my proposed Social Security test provokes some clear thinking. After all, if you would rather have a tax increase on all brackets, keep in mind that the increase will fall in part on those currently receiving Social Security benefits and the rest of the tax increase will fall on future Social Security beneficiaries. Roughly speaking, broad tax increase, reduction in Social Security benefits—same difference.

So, here is the acid test: would you advocate a reduction in Social Security benefits to pay for subsidies for windmills? If not, ax windmill subsidies.

Ensure you sign up to our newsletter to stay informed as these and other dynamics unfold.

We manage the Merk Hard Currency Fund, a fund that seeks to profit from a potential decline in the dollar. To learn more about the Fund, or to subscribe to our free newsletter, please visit .

William Poole
Senior Economic Adviser
Merk Investments, Manager of the Merk Mutual Funds

© 2011 Merk Investments® LLC
The Merk Hard Currency Fund is managed by Merk Investments, an investment advisory firm that invests with discipline and long-term focus while adapting to changing environments.

Axel Merk, president of Merk Investments, makes all investment decisions for the Merk Hard Currency Fund. Mr. Merk founded Merk Investments AG in Switzerland in 1994; in 2001, he relocated the business to the US where all investment advisory activities are conducted by Merk Investments LLC, a SEC-registered investment adviser.

Mr. Merk holds a BA in Economics ( magna ***** laude ) and MSc in Computer Science from Brown University, Rhode Island. Mr. Merk has extensive experience and expertise in how the global financial imbalances, as evidenced by an enormous trade deficit, affect the markets. He has published many articles describing complex economic phenomena in understandable terms and he is a sought after expert presenter and moderator at conferences. Mr. Merk is a regular guest on CNBC, and frequently quoted in Barron's, the Wall Street Journal, Financial Times, and other financial publications.

In addition to 20 years of practical investment experience, Mr. Merk has a strong foundation in both economic analysis and computer modeling. His research in the early 1990s focused on the use of computer-aided models in financial decision making; he is a published author in “Adaptive Intelligent Systems” * and has been awarded a prize for excellence in economics. **

Mr. Merk focused on fundamental analysis of US technology firms in the early to mid 1990s, he diversified to other industries to manage volatility in his investments. In the second half of the 1990s, Mr. Merk received an early warning of the building bubble when he recognized that more and more companies were trading in tandem, causing the diversification offered through investing in other industries to diminish. As a result, he broadened his investments internationally. As the bubble burst and Greenspan and the Administration preserved US consumer spending through record low interest rates and tax cuts, imbalances in the global financial markets reached levels that Mr. Merk deemed unsustainable. Merk Investments has since pursued a macro-economic approach to investing, with substantial gold and hard currency exposure.

Merk Investments is making the Merk Hard Currency Fund available to retail investors to allow them to diversify their portfolios and, through the fund, invest in a basket of hard currencies.

Axel Merk Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules