Twenty-five years ago, gold was $275 an ounce. Recently, it hit $4300 an ounce. Each dollar (to buy gold) is worth less than 1/15th of what it was in the year 2000. Our exports will thus be cheaper. But we don’t manufacture much anymore (military and some other things aside). Like Venezuela, Iran, Lebanon and Zimbabwe, we will not have much benefit from a weaker currency. Oil exports, the “black gold,” are holding off economic collapse in Iran and Venezuela, but just barely.

How can this affect us here in the Tri-Lakes? If Sunmount Development Center closes or consolidates downstate, if the Federal Correctional Institution, Ray Brook, shutters, if tuition goes up at North Country Community College, if the New York State Troopers reduce or re-allocate manpower, etc., it will matter. Medicaid and other health care reductions will impact many.

How did we get here? Look to the New York City (NYC) disaster in 1975. Since the 1940’s NYC has hugely expanded social services programs. They also boosted city employee raises massively for vote-getting. “A chicken in every pot, political handouts.” The money was not there. So they borrowed by issuing bonds. A bond is a loan repaid with interest. The money coming in was not enough to pay for the growing government salaries and ballooning social services. So NYC borrowed more and raised taxes. The middle class and businesses fled. Thus, tax revenue plummeted. NYC responds by raising taxes even more and cutting services. I remember the Fear-City and the crap hole NYC had become. A death spiral. Chicago and other places may be on the same path today.

Time finally ran out for NYC in 1975. The Arab oil embargo of 1973 made it an economic catastrophe. The bankers hesitated to loan NYC any more money. Some refused to buy NYC bonds. The city had too much debt. A loan to pay recurring bills (monthly, yearly, etc) is kicking the can down the road. The powerful unions (teachers, police, firefighters, sanitation, etc) all resisted the belt-tightening that was necessary to avert the bankruptcy. They eventually gave in; they had no choice: the city infrastructure was going under. The ship was sinking. It took the Municipal Assistance Corporation 33 years to rebuild NYC’s financial standing.

How has this been able to go on for so long? When the national debt ceiling hits, Washington, DC raises the ceiling — like raising the credit limit on your credit card. The federal debt then continues to grow by increased spending till the new limit is hit, then it is raised yet again. Over and over. National, state and city spending beyond the money coming in (budget deficit), is not just a Democrat or Republican thing. It’s been happening for generations.

Why borrow? Why not just print more money? We did. Now we have inflation. Inflation can be useful for paying off debt if the borrower (The U.S. government) takes the opportunity. But our government since after WWII seems to be adding to the debt, not trying to reduce it. Our inflation is not as bad as Venezuela, Iran, Lebanon or Zimbabwe — yet.

Our national debt is $38 trillion. The federal government earns about $5 trillion/year in income. The interest alone on the $38 trillion is bigger than the entire US military budget. State, municipal, personal and other debts add to society’s burden. Today, China and others are getting squeamish about giving us more loans (buying our bonds). If this continues we may have to raise the interest rate we pay on the bonds to make them more attractive. The more debt we have, the less attractive our bonds are. That cycle is a debt trap.

Like the red warning light on your dashboard or a crying baby, sharply rising gold indicates a problem, but not the cause or solution. There are other indicators of economic health: unemployment rate, M1, M2, M3, interest rates, and so on. But the gold price as a pure commodity is a result indicator, not a cause, mostly. The price of gold resists politicians monkeying around with the statistics to make them look good in an election year. Of course, there are other things besides government debt that affect the price of gold, but the yellow metal is a simple rule of thumb for people like me who don’t understand finance. Almost a canary in a coal mine.

Those of us who grew up in NYC in the 1970s during its financial collapse can remember what it was like. Times Square, the subways, rotting garbage on the street, burned out cars and buildings, omnipresent filth, graffiti everywhere, homelessness, heroin and hard drugs everywhere, the jump in violent crime, etc. For the same to happen statewide or nationally would be orders of magnitude worse than NYC in the mid-1970’s. If we continue to build debt, that’s where we are heading. We are approaching the limit of the “just-raise-the-debt-ceiling” circus. This charade ends if (when ?) the forces that buy our bonds decide not to. If China and others stop buying our debt because our “credit score” went to hell, we will be in big trouble. While improbable today, a Greece (2010) or Lebanon (2020) scenario for us is not off the table. Recently, Moody’s, S&P, Finch and other rating agencies have already begun to downgrade us. We no longer hold the highest rating.

Just a thought … and speaking of loans, I will gladly pay you Tuesday for a hamburger today.

Ira Weinberg is a resident of Saranac Lake