I spend a lot of time talking about monetary policy and deficit spending in these articles. It makes sense from my perspective. Recent history has demonstrated that drastically accommodative monetary policy measures, along with free-spending fiscal postures, can inspire significant interest in gold and silver.
The pandemic has served as the most recent example of this interest. The Federal Reserve announced in late March 2020 that it would be willing to engage in unlimited QE to help right the nation’s economic ship. At the same time, the federal government began logging massive increases in deficit spending as a part of its own response to the COVID-19 emergency. And from April to August last year, as these extraordinary monetary and fiscal measures were evolving, gold climbed roughly 27% and silver jumped 100%.
The economic environments that have cued these policies and the associated metals surges often are the result of acute crises such as the pandemic. But there now are rumblings that metals-favorable economic environments soon could exist more regularly outside of crisis conditions.
In a recent article for Reason.com, Peter Suderman suggests the recently passed pandemic stimulus package – the American Rescue Plan Act of 2021 – could pave the way for large-scale, permanent government assistance measures, including guaranteed income.1 If that happens, it makes sense to consider massive deficit spending and drastically accommodative monetary policy measures could become standard features of the nation’s economic profile. And if THAT happens, the implications for perceived safe-haven assets such as gold and silver could be substantial.
Suderman’s assertion that the American Rescue Plan could be the beginning of something akin to universal basic income (UBI) is rooted in the measure’s ostensibly temporary expansion of the child tax credit. Under the plan, individual filers earning up to $75,000 per year and joint filers earning up to $150,000 per year are eligible to receive the full amount of the credit. That’s up to $300 per month per child for one year. But congressional Democrats and the White House already have admitted they’d like to see the expansion become permanent.2
Suderman finds especially revealing the New York Times’ assessment of the child tax credit expansion: “The child benefit has the makings of a policy revolution. Though framed in technocratic terms as an expansion of an existing tax credit, it is essentially a guaranteed income for families with children.”3
Echoing the Times’ use of the phrases “policy revolution” and “guaranteed income,” Suderman speculates that “Biden’s recovery plan isn’t just (or even mostly) pandemic relief. And it’s not just a one-time infusion of cash to Democratic supporters and political allies. It’s the start of a new era of federal largesse, one that will move more Americans onto government support, perhaps for a long time to come.”
It’s too early to know if the expanded government assistance cued by the pandemic and the large stimulus package will be woven permanently into the national fabric. But we know there’s a strong preference for that to come to pass, including from the Oval Office. If it does, monetary policy could have an even bigger role in the enabling of a fiscal policy that some Americans see as downright wasteful.4 A more permanent expansion of government assistance could mean more frequent use of drastic monetary policy tactics historically viewed as suitable for deployment only in the gravest economic emergencies.
As it turns out, a new national socioeconomic environment that demands more help from the Federal Reserve could fit very neatly with the central bank’s existing plans. In February 2019, Mary Daly, San Francisco Federal Reserve President, publicly revealed the Fed was considering making QE a standard tool in the central bank’s toolbox, anyway.5
Speaking to reporters following a public appearance, Daly publicly pondered:
In the financial crisis, in the aftermath of that when we were trying to help the economy, we engaged in these quantitative easing policies, and an important question is, should those always be in the tool kit – should you always have those at your ready – or should you think those are only tools you use when you really hit the zero lower bound and you have no other things you can do?
Daly went on to admit that moving QE closer to the front of the Fed’s policy-tactic line was in consideration. “You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, but one that you would use more readily,” she said. “That’s not decided yet, but it’s part of what we are discussing now.”
When Daly talks about “executing policy,” she’s referring to monetary policy. But in my opinion, it’s reasonable to speculate on the role such a shift in monetary policy might play in helping to implement fiscal policies geared toward expanding the social safety net. It’s also reasonable to consider how precious metals assets might respond in that they are perceived to be hedges against potentially dollar-debasing and inflationary monetary and fiscal policy initiatives.
Two years ago, hedge fund giant Ray Dalio wrote about a coming “paradigm shift” in the way assets and markets likely would behave based on expected changes in macroeconomic forces and the geopolitical environment. In a much-publicized 2019 LinkedIn essay, Dalio detailed the nature of this possible shift and why gold could be a prized asset in what he sees as the new paradigm.6
At the time, Dalio said features of the paradigm would include “a reflationary environment accompanied by large liabilities coming due and with significant internal conflict between capitalists and socialists, as well as external conflicts.” Dalio went on to suggest gold would be the ideal “storehold of wealth” to have on hand “when most reserve currency central bankers want to devalue their currencies in a fiat currency system.”
In my view, I think Dalio is on to something with his prediction of a possible ongoing pro-gold environment. Much of America seems content to look past skyrocketing debt, massive deficits and ongoing super-easy money for the sake of bigger and broader social welfare. And as it does, it becomes increasingly difficult for me to imagine how physical precious metals would stumble in that new “paradigm” if it comes to pass.
With the latest large stimulus package as one of many possible indicators, macroeconomic forces could be shifting amid what some might consider a sea change in the values orientation of many Americans. As they do, navigating through the murkier financial waters that could result might prove a challenge. Might gold and silver help provide some clarity? Ray Dalio thinks so, with his vision of a possible future pro-gold environment. I think so, as well. After careful consideration, some retirement savers may conclude the same for themselves.
1 Peter Suderman, Reason.com, “Biden’s Coronavirus Relief Plan Will Probably Cost a Lot More Than $1.9 Trillion” (March 3, 2021, accessed 3/18/21).
2 Sarah Ewall-Wice and Jack Turman, CBSNews.com, “Biden is poised to send monthly Child Tax Credit checks to parents. Democrats want to make them permanent” (March 11, 2021, accessed 3/18/21).
3 Jason DeParle, The New York Times, “In the Stimulus Bill, a Policy Revolution in Aid for Children” (March 13, 2021, accessed 3/18/21).
4 Jonah Goldberg, The Baltimore Sun, “Bipartisan dysfunction is fueling reckless spending sprees” (March 10, 2021, accessed 3/18/21).
5 Reuters Staff, Reuters.com, “Fed debating if balance sheet should be regular tool, Daly says” (February 8, 2019, accessed 3/18/21).
6 Ray Dalio, LinkedIn, “Paradigm Shifts” (July 17, 2019, accessed 3/18/21).
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