Friday, August 19, 2011

Should We Open the Gold Window

The New American website published an interesting story this week. Charles Scaliger penned a piece in which he concluded that “Restoring a genuine gold standard would not solve all of our financial problems. But it would be a gargantuan first step in the right direction.”

He also pointed out that this week, which had seen such high market turbulence in the wake of the S&P downgrade, is the 40th anniversary of Nixon’s removal of the United States from the last vestiges of the gold standard.

Printing more money whenever it struck the government as a good idea has resulted in 40 years of financial instability, Scaliger points out. I can’t argue with that.

He points to a previous article in which Forbes magazine called for a return to the gold standard.

On the surface, this seems as likely as wishing on a star, but a few points are brought to our attention:
First, Nixon did not abolish the gold standard as it had existed from the founding of the country until the 1930s; he abolished the gold exchange standard which had existed since the end of the Second World War. This system did not allow ordinary American citizens to own gold coins, bullion, or certificates (a freedom that was not restored until 1974 by President Ford), or to redeem Federal Reserve notes in gold. That privilege was reserved for foreign holders of U.S. dollars only. This elitist “gold standard” was similar to that imposed on the peoples of Europe after World War I.
Scaliger points out that what he suggests would “require reforming several centuries’ worth of banking laws.”

The alternative? We’re living it.

Sacrificing the Dollar for Stock Growth

By now you must realize that the economic environment we all see outside our office windows is not a free market reality. The government has taken control and will continue to manipulate anything it can to create the outcomes it seeks. It appears that the only thing the government wants is a rising DOW. It’s willing to sacrifice the dollar to keep stocks rising.

Since the media seem to focus primarily on this indicator of financial well-being, it may be the government’s method of attempting to control consumer sentiment.

After Standard & Poor’s downgraded US debt and the stock market fell into a tailspin, most would think that the government’s power to manipulate the markets had been reduced. Not so.

The next day, the FOMC announced that it would not be increasing interest rates until at least the middle of 2013. Dan Norcini provides the resulting impact in his blog:
That acknowledgement, namely, that growth is so sluggish, the economy so moribond and unemployment so chronically high, sent money flowing into BOTH stocks and bonds at the same time. How's that for a neat trick by the boyz at the Fed? Here is the deal - the FOMC is attempting to drive money out of bonds and INTO equities based on the fact that they have guaranteed practically no return as far as yields go on short term Treasuries for at least two years.

Norcini calls this just another form of currency debasement, “but in a manner in which it is not so obvious as they had just come out and said, ‘We are going to do a QE3’.”

In effect, the government’s actions have indicated that there will be no growth in our economy for at least another couple of years, rendering the yield on US Treasuries low.

It may be time to start asking who is gaining from these actions. It’s certainly not the American taxpayer.

Thursday, August 11, 2011

Can We Stand Another Round of QE?

I’ve written a fair amount about the evils of the federal government’s Quantitative Easing program on this blog. I wrote about it back in May and again just a couple of weeks ago. And now, according to a story, a Goldman Sachs analysts is saying that another round may be likely.

The form this third round would take is likely to be traditional quantitative easing, according to Goldman analyst Jan Hatzius.
Other options are rate caps — in which the Fed promises to buy as many securities as needed to hit a longer-term target — a price level or nominal gross domestic product target — or interventions in nongovernment securities markets (which would need congressional funding). "Of these, conventional QE is very likely the option with the lowest hurdle and the first to be deployed," Hatzius concluded.
After the S&P downgrade and the massive selloff that started this week, Gold has skyrocketed in price as investors seek safe havens. The last time I checked it was at $1,800 per ounce.

It’s time more Americans woke up and started paying attention. I know a lot of people who feel bad about what’s going on with the economy, they feel uneasy about the steps the government is taking, but they don’t know why they feel that way. The more they watch the cable news networks, the more confused they become.

That’s because they are allowing the media to control what they think, instead of educating themselves and their children. This must change. Another round of QE might be what it takes to wake more Americans up. It’s not what our economy really needs.

Monday, August 8, 2011

Cracks in our Single Foundation

Not so long ago, back in early June, I wrote about the government's Quantitative Easing and how I was afraid that it was failing miserably.

At the time, I quoted from a post in Dan Norcini’s blog:
The one thing that has helped to keep some of the population from becoming completely depressed has been the fact that they could look at their 401K programs and still see that those were in the plus column for the year. In other words, while the rest of the world was seemingly going to economic hell, at least they were making a bit of money on their retirement accounts.
It was clear then that the federal government's actions were serving to prop up the stock market, which resulted in increased demand and higher prices, pushing 401(k) values higher. The fear was that it would end.

Today, the world watched as the New York Stock Exchange and NYSE Amex Cash Markets on Monday invoked a rule to smooth trading at the market open, as futures pointed to a drop of more than 2 percent.

The rule is designed to allow the exchange to suspend price indications in an attempt to speed the beginning of trading. It can be invoked when there is a lot of activity in the futures market before the markets open. Reporters from Reuters said:
S&P 500 futures SPc1 fell 28.2 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures DJc1 lost 248 points and Nasdaq 100 futures NDc1 dropped 48.75 points.

Friday, August 5, 2011

Everyone is Spending Our Money Now

Earlier this week, the federal government's Bureau of Economic Analysis released a press release around its June findings in the area of personal income and outlays. The Bureau seemed pleased that personal income and disposable income were both up in the U.S. during the month.
Personal income increased $18.7 billion, or 0.1 percent, and disposable personal income (DPI) increased $16.3 billion, or 0.1 percent, in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $21.9 billion, or 0.2 percent. In May, personal income increased $23.2 billion, or 0.2 percent, DPI increased $17.6 billion, or 0.2 percent, and PCE increased $5.9 billion, or 0.1 percent, based on revised estimates.
Real disposable income increased 0.3 percent in June, in contrast to a decrease of less than 0.1 percent in May, according to the Bureau.

All this may seem fine, like we're pulling ourselves out of something. But then I read further down in the release and found this:
Private wage and salary disbursements decreased $2.2 billion in June, in contrast to an increase of $15.0 billion in May. Goods-producing industries' payrolls decreased $1.8 billion, in contrast to an increase of $4.8 billion; manufacturing payrolls decreased $2.1 billion, in contrast to an increase of $4.1 billion. Services-producing industries' payrolls decreased $0.3 billion, in contrast to an increase of $10.1 billion. Government wage and salary disbursements decreased $0.4 billion, compared with a decrease of $0.5 billion.
How can Americans have more money if the private companies that employ them are paying out less? There is only one way. Americans are getting their money from the government, in the form of aid, benefits and unemployment.

The government, of course, is spending taxpayer money, which is money that until very recently belonged to you and I. This is not a recovery.