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Auguries — As Predicted

August 4, 2011

By Kevin Michael Grace

The debt ceiling “crisis” came to a bizarre and somewhat macabre conclusion August 1, as tears flowed when Gabrielle Giffords voted in favour of the grand compromise. The appearance by the Arizona Congresswoman was a surprise, as she had been critically wounded by a lunatic in January.

CNN reported that “Giffords voted against two previous increases in the debt ceiling. But in a statement issued by her office, she said Monday night’s vote was ‘substantially different, with the strength of the U.S. economy hanging in the balance. I had to be here for this vote. I could not take the chance that my absence could crash our economy.’”

As it turned out, her vote was not needed, as the Budget Control Act of 2011 passed 269-161 in the House. (And 74-26 in the Senate.) But its laboured symbolism could hardly be more obvious. Captain Obama was maneuvering the good ship America through perilous straits, and all hands were needed on deck.

August 4, 2011

The markets regarded the symbolism rather differently. SS America was engaged in a futile attempt to outrun a hurricane, and the ship was at risk from water pouring in from the breaches in its hull. The Dow fell 225 points the day after the deal was struck and fell 513 points Thursday to end the day at 11,384.

As predicted in this space, the grand compromise contains no actual cuts. Congress is mandated to reduce spending by $900 billion over 10 years, while the debt ceiling limit has been raised $2.4 trillion. Even the nominal cuts have been delayed until 2014. Meanwhile, US debt increased $238 billion the day after the vote. According to Agence France-Presse, “The new borrowing took total public debt to $14.58 trillion, over end-2010 GDP of $14.53 trillion, and putting it in a league with highly indebted countries like Italy and Belgium.”

To repeat, there are no cuts. Nevertheless, Obama decried a “manufactured crisis,” and to Vice President Biden there was no doubt who’d manufactured it—the Tea Party “terrorists.” So much for the pious appeals to avoid “inflammatory rhetoricafter Cong Giffords was shot. In addition to comparing the Tea Partiers to Norwegian terrorist Anders Breivik, psychologist Stanton Peele told MSNBC’s Martin Bashir that they are “addicts,” “delusional” and in the grip of “psychosis.”

The German publication Der Spiegel was more measured, drawing the non-inflammatory conclusion, “We look at it and see a Congress held hostage by a small group of radical Tea Party members unwilling to agree to any budget compromise and risking a US default.” Oh, and they’re also “irresponsible,” “unpatriotic” and risking “financial ‘Armageddon.’”

Armageddon having been averted, gold rose to further record highs, trading at press time at $1,681.50, with silver at $42.01. Garry White of the Telegraph argued, “The fact that an 11th hour deal was done and the ceiling was raised is a relief, but the process shattered trust and confidence in US politicians. There is also an uncanny correlation between the gold price and the US debt ceiling. Over the past 30 years, the gold price has tracked the ceiling whenever it has been raised.” White noted that the US economy is “flat lining,” that QE3 is “now more likely than it was even last week,” that the Eurozone is “imploding” and that “China is potentially overheating.” He concluded, “Gold at $2,000 by the end of the year is not a certainty—but everything is now in place to make it happen.”

According to Bill Bonner, “Gold is fundamentally a bet against America. It’s a bet that, over the long run, America’s experiment with a pure paper money system will not work…and that no matter how smart or innovative its central bankers and authorities are…they will not be able to hold the system together any better than any other geniuses throughout history.”

Or as Gerald Warner put it, “The Tea Party does not need to stop this madness: the law of fiscal gravity will.”

For all the hysteria directed against them, the Tea Party failed. But assuming that Bonner and Warner are correct, they will soon understand what the irresponsible, unpatriotic, delusional, etc, “metalheads” now know: “First they ignore you, then they laugh at you, then they fight you, then you win.” (Mohandas K. Gandhi)

As the metalheads have seen, however, the rising tide in bullion has not lifted the boats of junior miners. But as the Wild Hog at Seeking Alpha points out, “The more demand there is for gold, the more gold will have to be mined (pretty simple). These companies will be busy exploring all corners of the globe from Mexico, to the US, to China, to meet the rising demand. Finally, smaller companies…are interesting takeover targets.” In this regard, he suggests Extorre Gold Mines and Minefinders.

Also at Seeking Alpha, George Maniere says of silver miner Alexco Resource, “This company has Eric Sprott’s fingerprints all over it, and the shorts are trying unsuccessfully to kill it. I would advise everyone to take a good look at this stock because it won’t be long before this one is a winner.”

At the Globe and Mail, Celine Gaño includes Alexco in her list of “small-cap stocks to watch” and adds Pilot Gold and Yukon-Nevada Gold. Also at the Globe, Tony Martin notes the juniors currently in investor Rob Plowright’s portfolio: Rambler Metals, First Majestic Silver, Woulfe Mining and Belo Sun.

Finally, the New York Post reports that “Pennsylvanians on public assistance now have a new ‘civil right’—free cell phones.” The Post grouses that “the rest of us get to pay higher cell bills as a result.” But surely they would not begrudge the poor access to the latest pictures of Lindsay Lohan’s arraignments, Miley Cyrus’ tattoos and Kim Kardashian’s ass—images that will provide sorely needed comfort in the dark days to come.

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