Sequestration - Another Crisis by Another Name

by Lear Capital EditorialFebruary 19, 2013

First there was "the cliff," then there was "the ceiling" and now we have the "the sequester." ... how many ways can we say deadlock, impasse and stalemate? This latest fiscal "D Day" hanging over the US economy will be the talk of the pundits in the coming days as we add yet another idiom to America's financial vernacular and our national language of fiscal irresponsibility.

Sequestration refers to the latest automatic budget event set to trigger billions in mandatory cuts to defense and domestic spending starting March 1st. The irony of sequestration is that it was not designed to ever take effect. It was created as "a line" in the "political sand" and an impetus for Congressional action. It is a political last resort and the place where no politician dares to go. Its provisions attack sacred political party ground by hitting both defense spending and prized government programs like education, research and EPA funding. It has become, however, a fallback position for non-partisan failure.

The concept originated with the Gramm-Rudman-Hollings Balanced Budget Act of 1985 which called for spending cuts or "sequesters" to be triggered if the Federal Budget deficit exceeded an unacceptable threshold. US public debt stood at $1.95 trillion in 1985. The Act was declared unconstitutional in 1986. A revised version was passed in 1987, but it failed to reduce the deficit.

More recently, the Budget Control Act of 2011 formed the infamous Super Committee which was charged with trimming the Federal Budget by some $1.2 trillion. "Sequestration" was again the back-up plan in the event that the Committee failed to get the job done. In the last quarter of 2011 America's National Debt was $15.22 trillion. It is now over $16.5 trillion just 14 months later. Needless to say, the committee failed to get it done!

Unfortunately, Washington has a long tradition of failing when it comes to budgeting our money. The National Debt has steadily increased since 1975, topping $1 Trillion in 1982. In 1990 we hit $3.6 trillion, in 2000 we reached $5.66 trillion, and in 2010 we surpassed $14 trillion. We are currently borrowing about $6 billion a day as our new American century is already one characterized by excessive debt and inflated interest payments!

So, despite all of the austerity measures with the celebrated names, Washington's spending and borrowing problem continues to rage. "The cliff" was essentially extended, "the ceiling" was effectively raised, and "the sequestration" will most likely be prolonged as we continue to sink deeper into collective debt. The mounting federal deficits already plaguing the US economy will ultimately push inflation and interest rates higher and fuel mass uncertainty.

But during uncertain times Americans will do what they have done for generations ... turn to gold! Gold has maintained a positive relationship with US Debt for the last three decades and has risen steadily in value as the dollar has weakened, as America was downgraded, and each and every time Congress has failed to come up with any meaningful fiscal compromise or reform.

So, no matter what they call the next fiscal crisis look for gold to follow the inevitable upward trajectory of America's Debt. It remains the world's most tangible asset and history tells us that its final destination ... is higher than today.

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