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Sequester is Inconsequential, but Fed Policy Is Not

by Peter A. Grant

Mar 01, AM
(from USAGOLD.com) --

Gold is slightly better this morning having attracted some buying interest in front of last week's low at 1554.60, which protects the low end of the 14-month range at 1522.40. However, dollar strength and generally firm equities continues to weigh on the yellow metal.

Given the recent strength in both the greenback and US stocks of late, it would seem that investors are not concerned in the least about the mandatory sequester cuts that go into effect today. I think everyone pretty much realizes that within the context of a $15 trillion economy and a nearly $4 trillion federal budget, the $85 bln in cuts (CBO says the actual cuts are more like $44 bln) are pretty inconsequential. Yet to hear some within the beltway tell it, the end is nigh.

What's really concerning is that Congress would agree to something nobody allegedly wanted, as means to force them to reach some broader fiscal deal, which they then failed to do. When it comes to dysfunctional governments, Italy is sort of stealing the show right now, but we really need look no further than Washington, DC.

Nonetheless, more budget cutting is in fact expected to be a drain of about 0.6% on already weak growth, according to the CBO. This concern was reiterated by Fed chairman Bernanke this week in his Humphrey Hawkins testimony before Congress. "Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions," Bernanke said.

The inability of our Representatives in Washington to make any serious inroads with our absolutely horrendous fiscal situation — to the point of quarreling endlessly and pointing fingers over a lousy $85 bln — is going to keep the ball in the Fed's court for some time to come. They'll try and keeping the economy from stalling and unemployment from rising with the only tools at their disposal. Over the past decade, this reality has contributed mightily to the long term secular bull market in gold.

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Sequester is Inconsequential, but Fed Policy Is Not