If the Reserve Bank of India’s directors had any doubts about the wisdom of buying 200 tonnes of IMF gold — and likely dumping some U.S. Treasuries in the process — they had only to watch last weekend’s legislative activities on Capitol Hill. The proceedings provided plenty of reassurance that the move was a smart play.
Nothing in the healthcare reform bill that passed the House of Representatives should give investors in dollar-denominated assets any confidence that U.S. policymakers are serious about tackling the government’s structural budget deficit.
And if the dollar’s gradual decline hastens dangerously, deficit fears might well be the catalyst.
Yes, the healthcare plan does slightly trim the 10-year budget deficit from where it would be otherwise. But America’s long-term entitlement problems are such that healthcare reform needs to cut long-term health costs substantially rather than just being “deficit neutral”.
Even worse, to believe in even the modest claims of deficit neutrality, one has to also possess faith that some $500 billion in 10-year Medicare cuts will really happen. That is a monstrously tall order when Congress is working feverishly to restore those cuts in legislative side deals.
Another way the House proposes to pay for reform is through a 5.4 percent income surtax on wealthier Americans and small businesses.
Like America’s alternative minimum tax, this surtax is not indexed for inflation. So every year, the levy will affect more and more taxpayers. Unless, of course, Congress passes a temporary fix every year, as it does with the AMT. Such a move would protect the middle class, but it would also make expanded healthcare coverage a fiscal fiasco.
The House plan will surely be altered by whatever the Senate passes, assuming the Senate is able to pass anything. But the House bill is still a disturbing sign that fiscal rectitude is a low priority for at least half of the legislative branch.
Higher gold prices seem to go hand in hand with bad U.S. economic policy, be it the higher inflation of the Carter years or the budget busting of the Bush II years. And surging gold prices may be giving a thumbs down to Washington economic policy this time as well