Last Friday, Joe Biden made yet another bid for fame and glory: In an address to Congress, the president proposed the largest budget in U.S. history at 6 trillion dollars. The package includes the 2.3-trillion-dollar American Jobs Plan and the 1.8-trillion-dollar American Families Plan, which I’ve discussed before. It also includes another 1.5 trillion in discretionary spending. Toss in the required funds for mandatory spending programs – chiefly Social Security, Medicare and Medicaid – and voila! You’re at a shade over 6 trillion dollars for fiscal year 2022.
But the colossal budget President Biden aspires to this year looks to be just the first phase of an even greater spending vision, one poised to jettison the country into an unprecedented and truly remarkable federal deficit spending and debt foray. For retirement savers, the stakes couldn’t be higher as the nation appears ready to embark on a fiscal journey that could have significant, long-term consequences for dollar stability.
As it happens, physical precious metals have demonstrated a tendency at times in recent history to strengthen as deficit spending has ballooned. Might that tendency prompt some Americans to give gold and silver a hard look as they consider ways to mitigate the possible fallout from what looks like a new era in government spending?
The U.S. already has spent trillions of dollars in the fight against both the public health consequences and the economic consequences of the COVID-19 pandemic. But none of it counts toward what President Biden has planned in the form of massive budget spending going forward.
The 1.9-trillion-dollar American Rescue Plan passed in March has as its principal focus the nation’s economic recovery from the pandemic’s economic fallout. It is projected the cost of the plan will drive deficit spending this year to a new record high of 3.4 trillion dollars.1 But compared to what Biden and the Democrats have in mind overall, that may prove to be a drop in the bucket.
To begin with, it appears we’re entering a new era with respect to budget costs. The 6 trillion Biden wants to spend in 2022 would rise steadily through the coming decade, culminating in a 2031 budget of – wait for it – 8.2 trillion dollars.2 These are stunning numbers, particularly when examined in the context of annual budgets that have come before. The annual budget for fiscal year 2021 is 4.8 trillion dollars, which means Biden’s proposed 2022 budget would represent a 25% jump over what is now already the all-time budget record, in just one year. And the figure only goes up from there.
The budget numbers Biden hopes to see are startling enough. But how those anticipated budgets translate to deficit and federal debt figures could be an even bigger story.
The president has said previously that his proposed American Jobs Plan and American Families Plan would be covered by associated tax increases. Those include a stunning near-100% increase in the capital gains tax rate on taxpayers earning more than 1 million dollars per year.
But even if President Biden gets everything he wants in the form of tax increases – and that’s hardly a foregone conclusion – the government printing press still will be a necessary resource to pay for his largesse. According to the Committee for a Responsible Federal Budget (CRFB), budget deficits will enter a new era right along with budget costs.3 Here is some context: 2020’s current-record deficit was 3.1 trillion dollars, and 2021’s new deficit record is predicted to be even higher at 3.4 trillion dollars. The projected 2022 deficit, with our continued recovery from the pandemic, probably will be appreciably less than those two years if you believe the estimates. But it still would be the largest in history other than those 2020 and 2021 totals.
Things don’t improve much from there. The government is projected to continue running annual deficits of at least 1.3 trillion dollars through the rest of the decade, with 2031’s deficit expected to climb to 1.6 trillion. In other words, even though it’s anticipated we’ll not see annual deficits the next 10 years run as high as those of 2020 and 2021, each of the expected deficits we will face are likely to rank among the top 12 annual deficits in U.S. history. And the CRFB says budget deficits will total 14.5 trillion dollars over the next decade.
As you might imagine, the impact on the federal debt of all this spending is expected to be substantial. The CRFB points out that over the next decade the debt will grow by 17 trillion dollars from its present level of a little more than 22 trillion dollars. That’s a total federal debt of more than 39 trillion dollars by the end of fiscal year 2031. By that time and at that level, the debt will represent 117% of the nation’s gross domestic product (GDP).
In my opinion, the president is hoping the nation will be comfortable with a “new normal” when it comes to virtually unrestrained spending – a new normal that suggests there are no consequences to debt at any level. Those retirement savers who aren’t convinced the perpetuation of record spending won’t eventually lead to a dollar crisis – among other problems – might find noteworthy the recent performance of precious metals during periods of ballooning deficits. (Positive performances of gold and silver often coincide with a weakening of the dollar.)
A lot is made of the robust performance of gold and silver during the 2008 financial crisis, when the Federal Reserve first introduced quantitative easing (QE). But it’s worth noting expansionary monetary policy at that time was accompanied by historic increases in deficit spending. During fiscal years 2009, 2010 and 2011, the federal government logged what at that time were the three highest annual budget deficits in history. Shortly after the beginning of fiscal year 2009, gold and silver embarked on a memorable run for the next 2 ½ years. From November 2008 through August 2011, gold climbed 160% and silver rose 340%.
Last year, we saw a similar pattern play out. In an effort to keep the country’s financial ship upright as the pandemic’s economic fallout quickly spread, the Federal Reserve announced “anything goes” accommodative monetary policy measures in late March.4 At the same time, the federal government did what it surely felt was its part by going into emergency spending mode. From March through September – the last month of the fiscal year – deficit spending surged 320%, from 744 billion dollars to 3.1 trillion dollars.5 During those same months, gold jumped nearly 30% and silver soared 90%.
Massive deficit spending is by no means the sole determining factor in whether precious metals strengthen at a given time. There are a variety of factors that appear to have exerted a beneficial influence over metals historically. Ultra-easy monetary policy is one of those. So is inflation. But gold and silver have shown the potential to respond favorably to sharp increases in deficit spending, as well.
Perhaps we are on the verge of a “new normal” when it comes to deficits and debt – an era characterized by a wanton and chronic disregard for fiscal soundness. If so, retirement savers may wish to embrace the potential fiscal soundness of adding precious metals to their holdings, in opposition to the soundness their government seems content to disregard.
1 Kimberly Amadeo, The Balance, “What Is the Current U.S. Federal Budget Deficit?” (May 9, 2021, accessed 6/3/21).
2 Kathryn Watson and Sara Cook, CBSNews.com, “Biden unveils record $6 trillion budget for 2022” (May 29, 2021, accessed 6/3/21).
3 Committee for a Responsible Federal Budget, CRFB.org, “President Biden’s Full FY 2022 Budget” (May 28, 2021, accessed 6/3/21).
4 Federal Reserve, FederalReserve.org, “Federal Reserve announces extensive new measures to support the economy,” (March 23, 2020, accessed 6/3/21).
5 Bipartisan Policy Center, BipartisanPolicy.org, “Deficit Tracker” (May 17, 2021, accessed 6/3/21).
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