August 2026 - Week 2 Edition
Our Mid-Month Deficit and Inflation Update
The monthly budget deficit and inflation numbers for July came out on Wednesday, August 12. Inflation seems benign and short-term but the budget numbers are not. July was particularly bad with a $431 billion monthly deficit. The data shows the federal government taking in about $1,000 per person in tax revenues ($334 billion) but spending about $2,300 per person. This reflects another year of runaway government deficits, as neither political party seems serious about or even slightly concerned about the explosive rise in military and social spending, plus the higher costs of servicing our federal debt.
From a 10-year Treasury bond rate of 3.95% on February 27 – the day before the new conflict in Iran began – the 10-year rate closed July at 4.74%, up 79 basis points but up 20% in terms of interest rate costs.
According to the Congressional Budget Office (CBO), the federal government borrowed another $1.9 trillion over the past 12 months. Based on data for the first 10 months of the fiscal year 2026, which is from (October 1, 2025, to September 30, 2026) the CBO now estimates the FY 2026 deficit will be $2.1 trillion. That is significantly above the $1.9 trillion deficit estimated in its earlier forecast from February.
For July alone, the CBO estimates that the one-month deficit reached a staggering $431 billion – the difference between a huge $765 billion in spending and a much smaller $334 billion in revenues. That makes for a monthly deficit roughly $140 billion larger than the deficit in July 2025. Much of the increase is due to a shortfall of about $250 billion in tariff revenues coming in – a trend that was easy enough to predict, since nations don’t generally ship goods that guarantee them a major loss due to high tariffs.
The deficit is now over 6% of GDP. The problem, as always, is spending, not tax revenues. In July 2026, the federal government spent about $135 billion above July 2025 levels, while July revenues were down $5 billion from last year, netting a $140 billion increase in the deficit over the same period a year ago.
On the inflation front, the Consumer Price Index (CPI) was released early Wednesday, August 12, and it was not much cause for concern on a short-term basis, as energy prices declined in July and the overall inflation rate just inched up 0.1%. That is barely a 1% annual rate after falling 0.4% in June.
Longer term, inflation is still a concern, as prices over the past 12 months have advanced 3.4% higher. The energy portion of the index fell by 1.5% (nearly a 20% annual rate) in July but it fell from a much higher price level than we saw before the Iran conflict began on February 28. The energy index has increased 14% for the 12 months ending July (and gasoline is up 23%). Interestingly, a significant portion of the cost of gasoline comes from taxes, according to data from the American Petroleum Institute. On the federal level, the tax is about 18.4 cents per gallon but on the state level it varies from 8.95 cents in Alaska to 70.92 cents in California. The state tax in Texas is 20-cents per gallon, while the state tax in Oregon is 40 cents per gallon. The food index increased 3% over the last year, according to USDA’s Economic Research Service.
Recalling the 55th Anniversary of the Final Gasp of the Gold Standard
On Sunday night, August 15, 1971, President Richard Nixon appeared on national television to institute wage and price controls, some specific tariffs and the most shocking monetary moment since the 1934 gold recall: He “closed the gold window” to foreign nations wishing to exchange U.S. dollars for gold at $35 per ounce.
Currencies can, and often do, go bankrupt, some more rapidly than others, and the U.S. dollar has been sliding toward bankruptcy over the past 55 years. This currency collapse is not new in history. In his new book on “The Secret History of Gold,” Dominic Frisby writes, “Of the roughly 750 currencies that have existed since 1700, only about 20% remain, and all have been devalued.”
Of the hundreds of currencies existing in 1850, only three survive: the dollar, the pound and Swiss franc, with the dollar and pound down by a huge margin to both gold and the still-strong Swiss franc (up 5-fold to the dollar since 1971). That’s partly due to the fact that the Swiss franc was 40% backed by gold through 1999.
August 15, 1971 “was a landmark in the history of money … opening the door to the world of floating fiat currencies, untethered from any real value ... Ever since, without the discipline of gold, western governments have bloated to unprecedented size, fat on waste, war and welfare.”
–Dominic Frisby, “The Secret History of Gold” (2026), page 169
The dollar was as good as gold from 1792 to at least until the birth of the Federal Reserve in 1913. Until the 1970s, the dollar held its own against inflation and devaluation until Nixon untethered the dollar from gold 55 years ago. The dollar has been greatly devalued against gold since that date – falling well over 100-fold, meaning today’s dollars are worth less than a gold-backed copper penny was worth 55 years ago.
Some might argue gold offers no interest income, while cash and bonds offer income. OK, let’s factor in interest income minus inflation. In that case, the real return for paper dollar bills (interest income minus inflation) has been slightly negative. At the seemingly trivial rate of -0.1% per year, or about 1% per decade, or 10% per century, paper money has declined, while the real return on gold has been +1.6% per year, which may sound low, but compounding 1.6% per year for 100 years turns into a real quadrupling. So, which would you rather have over a lifetime – a 10% loss on your paper money or a 300% gain on your holdings in gold – both numbers reflecting interest rate income minus inflation?
In the 55 years since President Nixon closed the gold window, gold is up over 125-fold, from $35 to $4,400. Silver is 45-fold, from $1.45 to $65, and the major stock market indexes are up 63-to-80-fold:
Think of that the next time somebody tells you gold cannot compete with currencies or bonds “since gold offers no interest income.” History says, “so what?” Give me the better real total gains – in gold.
Gold is up 10% so far in August and silver is up 13.5%. It appears silver finally set a firm new floor above $60 and is trading up to $65 this week, while the S&P 500 is up only 3.2%, NASDAQ is up 4.2% and the Dow is up 2.5%. It also appears that GOLD has set a new floor of $4,000 per ounce and it began moving off that base over the past week. This week, gold is at $4,375 an ounce as of early trading on Friday, up an additional $11 per ounce by 8 a.m. Additionally, GOLD has risen despite downbeat economic news reports, like the loss of net new jobs in July, creating anticipation that the next interest rate move will be a rate cut rather than a rate increase, which most pundits anticipated before the last Fed meeting.
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