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The United States has the largest gold reserves of any nation in the world by a significant margin. The U.S. is reported to hold about 8,133.5 metric tonnes of gold. Germany is a distant second with 3,401.0 metric tonnes of the yellow metal. Italy has 2,451.8 metric tonnes in reserve. Could nations tap into their gold reserves to ameliorate their sovereign debt woes? Let’s take a look at the numbers.

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Presently, the Italian government’s annual deficit is nearly 4% of national output. In order cover this year’s budget shortfall at current spending levels, Italy would have to raise $72 billion. One way to do this might be to sell $72 billion of gold.

Unfortunately, Italy’s total gold holdings are only worth about $81 billion at today’s prices. That doesn’t get the Italian government very far considering Italy’s current debt has grown to almost $2.2 trillion after years of fiscal irresponsibility. Furthermore, Italy is going to have to come up with $151.55 billion in financing from September to the end of this year just to avoid default, according to Goldman Sachs. It seems the Italian welfare state is insolvent, having spent far more than they have or will be able to generate. The facts do not bode well for the world’s eleventh largest economy looking at a mountain of debt that is over 120% of national output.

The situation in the United States is not much brighter. The U.S. has 3.3 times the amount of gold as Italy, but nearly 6.6 times the amount of government debt. Sure, the U.S. has the largest gold reserves in the world, but the total amount of gold held by the United States is only worth about $270 billion at today’s prices. In other words, all of the gold held in Fort Knox and at the various U.S. mints would be enough to cover about one half the cost of Obama’s newest proposed spending bill.

In fact, at today’s prices, the value of all the gold ever mined in the history of the world comes to a grand total of $5.2 trillion. That is just enough to fund the U.S. Federal government for a little over a year at current spending levels.

The fact that government debt far outpaces the amount of gold reserves may be another signal that gold is undervalued relative to fiat currencies. This could actually turn out to be a golden opportunity to reduce sovereign debt. Perhaps, instead of dumping all of their gold at once to pay down debt, nations like the U.S. or Italy could actually take advantage of their large gold stocks and the public’s new appetite for gold by minting new coins of various weights and then selling them at a premium. The proceeds from the sale of new coins could be used to retire existing debt. As the new coins circulate, the public will be more accepting of gold. Increased demand will give countries like U.S and Italy a larger future income stream from selling their bullion.

Some economists have argued that over-extended governments should sell their assets on the open market to pay down the massive debts they have incurred. I certainly agree. This would reduce government debt and return valuable resources taking from the private sector. Gold reserves should be included in such an auction.

It is unlikely governments will sell bullion to pay debt. It is more unlikely governments will reduce spending in any meaningful way so long as it is easier for the politicians to print colorful paper tickets or make electronic entries to inflate the money supply. The chief problem is that governments do not have nearly enough real resources, actual or projected, to cover the cost of their exorbitant spending.  

History tells us that this age-old political game usually ends with destruction of the currency. It is unlikely the dollar or the euro will fare differently this time around as long as governments are controlling the money.

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Now that we’ve had exactly one month to digest the debt ceiling debacle, followed by the S&P’s downgrade of the US government, let’s take a deep breath and consider the reality of the situation.

The United States government remains very much in the midst of fiscal disaster. The debate over raising the debt ceiling for the 75th time since 1962 was a complete distraction from the real problem: Out of control government spending.

The meager deficit reductions included as part of the debt ceiling deal represent a decrease from the amount of increasing government spending. This was not an overall decrease in spending.

At the end of 2012, the government’s debt will have reached a total of over $16.5 trillion from its current level of $14.6 trillion. Ten years from now the U.S. government’s debt will reach $22 trillion dollars, given the most conservative projections. That is 51% higher than it is today. Today, our government officially spends about 3.4 trillion per year. In ten years, annual spending levels are projected to be 5.2 trillion per year by the CBO.

Given those projections, the government has knowingly promised to put us in debt to the tune of at least $22 trillion dollars. If that is the case, why didn’t Congress just raise the debt ceiling to $22 trillion since that is what they are promising to do anyway?

On August 2nd, our elected officials authorized the U.S. Treasury to borrow and spend an additional $2.4 trillion dollars over the next 15 months - conveniently, long enough to make it though the next election cycle. Clearly, the entire process of raising the debt ceiling for the 75th time since 1962 has been one of smoke and mirrors by both political parties.

But raising or not raising the debt ceiling isn’t the issue. The government is going to find a way to spend the money it wants to spend. Without question, the debt ceiling has proven to be an ineffective tool to constrain out of control government spending. At best, it is an inconvenient formality and an opportunity for cheap political posturing.

The evil here is not in the abuse of continuing to raise the debt ceiling; but rather in the government’s use of debt borrowing to fund spending on programs with which the government has no legitimate authority to be involved in the first place.

The appetite of government cannot be quenched and will continue to consume the wealth and income of those working in the productive private sector as long as we let it. We are caught in the “iron triangle” of politicians, bureaucrats, and special interest groups.

The only real solution to our government’s debt dilemma is to challenge the justifications for the size and scope of Washington’s reach over the lives the American people. The government has shown it has no plans to get its fiscal house in order.

Americans should rediscover the proper role of government and to stop asking the government to do things for us that we are not willing to do ourselves.

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