As the US presidential election draws closer, many continue to wonder how the outcome will affect financial markets. Among gold market observers, there has been speculation about how the metal might react if Mitt Romney wins. Many have hypothesized that the more conservative Romney might tackle unsustainable government spending, leading to an improved economy and thus a falling gold price. But a close examination of his views reveals that even if Romney is elected, it would be wise to hold on to your bullion.
While there are certain details that the two candidates disagree on, there is a strikingly large amount of common ground. Sadly, none of it seems to be good in regards to the dollar. Both candidates point out the need to reduce the deficit, but provide little detail on exactly how that will be achieved. In response to the coming fiscal cliff they both want to extend tax cuts (Obama for the middle class and Romney across the board). Reducing taxes is good for economic growth, but the effect is negated without a reduction in spending; absent these cuts, government debt will continue to grow.
Romney has been critical of Obama’s fiscal record – and rightly so. But despite his vow to be more fiscally conservative, his budget mentality sounds eerily similar to Obama’s. Romney has called for a stunning $2 trillion increase in military spending yet has failed to identify any significant cuts, and has explicitly pooh-poohed talk of Social Security and Medicare reform. The budget is in dire need of cuts, yet Romney’s policies seem to involve more spending and little cutting.
Much has been made of vice presidential candidate Paul Ryan's deficit cutting credentials. Many liberals have criticized the “Ryan plan” as being too draconian and aggressive. His plan is already a stretch in that many of the assumptions that it is based on are highly improbable (the inflation and unemployment assumptions are particularly hard to fathom). Even in the event that these projections are achievable, the plan still only hopes to reduce the current rate of increase in spending. Combine this with the $4.5tn in tax cuts that he calls for, and it looks if anything as if deficit spending will increase under a Romney/Ryan administration.
Regardless of whether Obama or Romney wins, the one thing that is certain is that the next president is going to be a neo-Keynesian. Obama’s economic philosophy has been on display for the last four years and leaves little confusion as to what he believes in. And while Romney has been critical of the Fed and made friendly noises in the direction of the sound money element within the Republican Party, there is little evidence that he really grasps the severity of the current economic situation. Would he appoint a Federal Reserve chairman who favored a strong dollar, and was willing to reduce the Fed’s bloated balance sheet? Who was willing to return interest rates to sensible levels that gave savers a real return on their money? It seems awfully hard to imagine.
Even if this unlikely scenario were to pan out, appointing a more aggressive Fed chairman who raised interest rates would encourage short-term economic contraction, and massively increase the federal government’s interest expenses. Is it remotely realistic to assume that a first-term president would support this, and be willing to let a cleansing recession play out on his watch? Not a chance.
Romney also mentioned in a recent debate that if he were elected president, he would label China a currency manipulator on his first day in office. While China does manipulate their currency via their soft peg to the dollar, it’s somewhat hypocritical to accuse them of currency manipulation barely a month after the Fed unveiled its policy of perpetual money printing. More serious is the fact that he appears sanguine about the possibility of a trade war with the nation’s biggest creditor. This will mean continuing efforts to devalue the dollar relative to the yuan, with all the bullish gold price and inflationary implications that entails.
A key reason why gold and other precious metals are such good assets to own today is that the US economy is past the point of no return. There are no solutions that will calmly undo the damage and make everything OK again. If spending levels were cut drastically and quantitative easing brought to a halt, as favored by fiscal conservatives, the economy would contract severely and America would be facing a Greek situation. On the other hand, if we pursue the neo-Keynesian, interventionist policies favored by the establishment and liberal-left, then the country continues along a path to potentially serious inflation.
Human nature, history and current political dynamics point to the latter as being the more likely course of events, though we can but hope that our leaders see the error of their ways. Obama or Romney? As far as gold is concerned, it doesn’t matter. The deficit spending and money printing will continue, and along with them, higher and higher gold prices.