Yesterday, Federal Reserve Chairman Ben Bernanke got all confused when asked whether gold is money and why central banks hold gold instead of diamonds. Watch the last 32 seconds of this youtube clip:
I know I am not the Chairman of the Federal Reserve, but at least I’ve heard about fungibility. Heck, even wikipedia mentions:
Diamonds are not fungible because diamonds’ varying cuts, colors, grades, and sizes make it difficult to find many diamonds with the same cut, color, grade, and size.
In contrast to diamonds, gold coins of the same grade and weight are fungible, as well as liquid.
If the Fed Chairman needs more information about why gold is money, he should google “why gold is money.” Now, I just need a good answer as to why pieces of paper with pictures of Presidents on them are considered money.
Ireland on the brink as budget crunch looms
Austerity threatens growth, but markets leave Dublin little choice
After promising a 15 billion euro ($20.7 billion) austerity package of spending cuts and tax hikes, Ireland’s government may be facing its last chance to avoid a bailout by persuading markets that the country can repay its debts.
Yields on government bonds have soared in recent days as investors increasingly fear that the only long-term option for Ireland will be a bailout from Europe. But sympathy for Brian Cowen’s Fianna Fail–led coalition is almost nonexistent among Dubliners, who see the government as the biggest villain in the collapse of the Irish economy…
Please read the whole article, but I’ll summarize it in just a few words: Ireland is damned if they do and damned if they don’t. If Ireland does nothing, it will be unable to repay its debts. In other words, it will default if it is not given a bailout. But the EU will not bail out Ireland if it does not reduce its deficit.
If Ireland chooses to reduce its deficit, which it is trying to do, it will require massive tax increases and/or huge cuts in spending. Either will result in massive protests and economic harm.
Western governments have been spending more than it could afford for nearly a century now. In the US, it started in 1913 with the emergence of the Federal Reserve and ratification of the income tax amendment. It got worse with the two world wars, Great Depression, and breaking from the gold standard. Now, countries like Ireland, Greece, Portugal, and Spain have only years, if not months, to get their houses in order. After 100 years of failure, we are now paying the price.
Posted in Deficits, Economics, Federal Reserve, Gold, Government spending, Sovereign debt crisis
Tagged 2010 European sovereign debt crisis, Bailout, Brian Cowen, Dublin, Economy of the Republic of Ireland, European Union, greece, International Monetary Fund, Ireland, portugal, spain
For years, gold bugs and other “crazies” have called for returning to the gold standard. “Smarter” people argued against using the “barbarous” metal as a standard, foretelling a return to the Dark Ages. Well, the “crazies” no longer look so crazy and the “smart” people no longer look so smart. Marketwatch reports:
The president of the World Bank said in a newspaper editorial Monday that the Group of 20 leading economies should consider adopting a global reserve currency based on gold as part of structural reforms to the world’s foreign-exchange regime.
“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” said Zoellick.
He said such a reform would reflect economic realities and should be considered as a successor to the existing global currency paradigm known as “Bretton Woods II.”
Zoellick said a return to some sort of currency link to gold would be “practical and feasible, not radical.”
To adjust Churchill’s famous quote for this situation: The gold standard is the worst system of currency, except for all those other systems that have been tried.
Posted in Capitalism, Economics, Gold
Tagged Currency, Dark Ages, G-20 major economies, gold, Gold standard, International monetary systems, Reserve currency, Robert Zoellick, World Bank
A couple of news stories in the ongoing sovereign debt crisis.
Bad news for Ireland:
The cost of insuring Irish debt against default hit a fresh record Friday with investors fearing that Ireland’s draconian budget cuts will slow economic growth and further weaken public finances.
Spreads on Irish five-year sovereign credit default swaps topped 6.10 percentage points Friday, according to data provider Markit, after having briefly touched 600 basis points Thursday.
This means that investors will have to pay EUR610,000 annually to ensure EUR10 million Irish debt against default. Some market watchers note that CDS trading starts to dry up at these levels as investors worry about being caught on the wrong side of the trade.
CDS are tradable, over-the-counter derivatives that function like an insurance contract for defaulting on debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller.
The Irish 10-year yield spread over German bunds, which show how large a premium investors demand to hold Irish bonds versus more-stable German debt, also hit a record of 5.31 percentage points Friday.
Bad news for Spain:
The Bank of Spain on Friday said it estimates third-quarter gross domestic product in the country was unchanged from the prior quarter. That follows a gain of 0.2% in the second and 0.1% in the first quarter. In a monthly economic bulletin, the Bank of Spain said the economy likely grew 0.2% on an annual basis in the third quarter. Official third-quarter GDP data will be released by the National Statistics Institute on Nov. 11. The Bank of Spain said growth was likely stymied by government austerity measures and the effects of consumers tightening spending as value-added taxes went up from July 1.
Today, the Dollar is up as traders sell Euros. Even with the Dollar up (which usually hurts commodity prices), gold and the other precious metals are rallying to record highs. Traders are looking for safety as the chances of an Irish default increase. Furthermore, we are seeing in Spain that “austerity” is a bitter but necessary medicine.
After years of liberal government spending and big deficits, Ireland and Spain (along with Greece and Portugal) are damned if they do and damned if they don’t. Unfortunately, the United States is not that far behind them.
Posted in big government, Economics, Gold, Government spending, Sovereign debt crisis, Stimulus spending
Tagged 2010 European sovereign debt crisis, Bank of Spain, big government, Credit default swap, Default (finance), Deficit, economics, Government, Government debt, government spending, greece, Gross domestic product, Ireland, Irish people, Markit Group, spain, United States
The Treasury announced that the total cost of TARP would be just $50 billion. In their perverse logic, the Administration and media played this up as a government success story. But we really should look at TARP as an investment. Congress approved spending $700 billion for TARP, of which only $296 billion was spent. Looking at TARP as an investment, the government lost 16.9% over a two year period. And they call that a success!
What else could the government have done with the $296 billion? Since TARP was signed into law on October 3, 2008, the following instruments have produced these returns:
||Troubled Asset Relief Program
||iShares Barclays 20+ Year Treas Bond
||iShares Barclays 7-10 Year Treasury
||iShares Barclays Short Treasury Bond
||SPDR Gold Shares
||Financial Select Sector SPDR
All major markets (stocks, long-term bonds, intermediate-term bonds, short-term bonds, and gold) posted positive returns. In some cases, very good returns. As you can see, I added the Financial sector into that table, which declined slightly more than TARP. Most of TARP’s investment were in the financial sector. The small difference is largely a rounding error because I am looking at XLF’s return up to today whereas the Treasury is using expected returns as of some future date. And that is assuming you trust their accounting…
But this raises the question of why they invested in the worst performing market sector? Those of us who argued that they were throwing good money after bad were correct. Maybe Treasury lost less money than we expected, but we were still correct in predicting negative returns on this investment.
Of course, the government claims that TARP saved the financial system from utter destruction. Oh, to live in a world where you can make outrageous claims without any proof. Next thing you know, the government will claim that the American Recovery and Reinvestment Act of 2009, also known as the stimulus bill, “created or saved” millions of jobs, even though the unemployment rate has remained steady near the 10% level.
Posted in Economics, Gold, Government spending, politics, Redistribution, Stimulus spending, Unemployment
Tagged American International Group, big government, Business, Deficit, economics, Finance, Financial services, Government, Government debt, government spending, Investing, Stocks and Bonds, TARP, Troubled Asset Relief Program, unemployment, United States, United States Department of the Treasury