Tag Archives: gold

Schooling Ben Bernanke on the merits of gold

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.

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The end of fiat currencies and return of the gold standard?

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.

Ireland bails out banks. Deficit 32% this year. Sovereign debt crisis continues.

The debt crisis finally forced Ireland into making a decision. Ireland had to choose whether to let its banks fail or bail them out. Neither choice was pleasant and both would have had severe repercussions. Not surprising, Ireland took the easier way out. Marketwatch reports:

The cost of bailing out nationalized lender Anglo Irish Bank could soar to as much as 34.3 billion euros ($46.6 billion), the country’s central bank said Thursday, as it also unexpectedly told Allied Irish Banks to raise a further €3 billion.

The new figures, along with the money already injected into other banks and a possible further capital increase for Irish Nationwide Building Society, could see the total cost of the industry bailout hit as much as €50 billion.

In a highly-anticipated assessment of the cost of the financial crisis, the Central Bank of Ireland said it expects Anglo Irish to need €29.3 billion in total, but added the figure could rise by another €5 billion under a “stress scenario.”

The bank has already received €22.9 billion of that total after suffering massive losses as the country’s housing market and construction industry collapsed, dragging the whole economy down with it.

Here’s the key section for those watching the debt crisis and the increasing socialism and economic fascism occurring around the world:

The extra cash for the banking system means the deficit in 2010 will soar to around 32% of gross domestic product, compared to a previous estimate of 12%. The government will announce a new four-year budget plan in November to ensure it can meet this commitment.

A 32 percent deficit!!! That has to be some kind of record.

But what choice did Ireland have? It could have let the banks fail, which would have sent the country to economic turmoil. Instead, it chose to socialize the banks’ debts and is risking the creation of a huge moral hazard. Ireland chose to trade short-term chaos for long-term chaos.

In reality, Ireland is hoping for an economic recovery that will lift its economy and help it reduce its deficit and pay off some of the debt. But will that recovery come soon enough? Will it be strong enough? Will the Irish government and Irish banks suddenly develop the fiscal discipline that it has lacked so far?

I don’t blame Ireland for the choice it made. The problem was not the choice it had to make last week, it was the choices it and other governments, including the United States, have made over the previous decades of loose money, free spending, and debt accumulation.

But we must remember, this story is far from over. It has simply shifted from one of a gushing flesh wound to a slow and festering wound that has not yet been repaired. I repeat: The sovereign debt crisis is far from over. In fact, it is just beginning.

The sovereign debt crisis is far from over. In fact, it is just beginning.

Anybody who thought the sovereign debt crisis was over, it is now time to wake up. Irish credit default swaps hit a new record today!

Irish government bond yields rose and the cost of insuring sovereign debt against default jumped Friday due to ongoing jitters over the cost of bailing out Ireland’s troubled banking sector.

Analysts tied the weakness in part to a research note published Thursday by Barclays Capital warning that the Irish government could eventually be forced to seek outside help from the International Monetary Fund and European Union if the fiscal situation proves worse than expected.

The spread on five-year Irish sovereign credit default swaps hit 433 basis points, up from 387 basis points on Thursday — soaring to the widest level on record, according to data provider Markit. That means it would now cost $433,000 a year to insure $10 million of government debt against default, up $36,000 from Thursday.

For months, the various world governments and mainstream media told us that the debt crisis was over. Why? Because countries such as Greece, Spain, Portugal, and Ireland would reduce their budget deficits. Not eliminate them, just reduce them.

For example, Portugal:

Portugal posted a deficit of 9.3 percent of gross domestic product in 2009, the fourth-highest in the 16-country euro region. The government aims to narrow the deficit to 7.3 percent this year and intends to meet the EU’s 3 percent limit in 2012.

Yes, a 3 percent deficit is preferable to a 9.3 percent deficit, but with debt of 75 percent of GDP as of 2009 (much higher now), they are only switching from a quick death to a slow one. Besides, their deficit target is based on assumptions of a growing economy. What if the economy does not grow? The deficit will be wider than expected and their debt problem will get even worse.

Or Spain:

Zapatero has imposed tough austerity programmes, aiming to slash the budget deficit to 3 percent of gross domestic product by 2013 from 11.2 percent last year.

Again, 3 percent is better than 11.2 percent, but the slow bleed continues. They are simply putting a band-aid on a broken arm.

And in Greece:

The government plans to cut the budget deficit to 8.1 percent of gross domestic product this year from 13.6 percent last year.

Again, I’m unimpressed. Greece’s debt is already 113 percent of GDP. Is there any way to recover from that besides running budget surpluses, which would require sharp cutback in government services?

And what is the situation like in Ireland, Europe’s new bogeyman?

Analysts say this year’s budget deficit could reach around 25 percent of gross domestic product (GDP) including the one-off costs associated with bank bailouts.

Even without the one-off bank bill, the shortfall is still expected to be around 10 percent next year on an underlying basis, over three times an EU limit of 3 percent, according to the latest Reuters poll.

Are you serious? A 25 percent deficit is possible this year? And an “improvement” to 10 percent next year?

By the way, the situation in the United States is not much better. This year’s deficit is expected to be 10.6 percent of GDP. Next year’s: 8.3 percent. Eventually, if all things go according to plan, which they never do, the deficit will fall to 3.9 percent of GDP. Not much better than those failing European countries.

And the government/mainstream media is trying to convince us that there is nothing to worry about. Gold is looking more and more attractive every day.

Possible new gold disclosure rules. Hurting you in the name of consumer protection.

With gold hitting record highs, it is obviously time for Congress to do something stupid. Seeking Alpha reports:

A press release from Rep. Anthony Weiner, Democrat of New York, not yet (as of this instant) posted on Mr. Weiner’s Web site, announces that a September 23 hearing of the Subcommittee on Commerce, Trade, and Consumer Protection (a subcommittee of Rep. Henry Waxman’s Commerce Committee) will focus on “legislation that would regulate gold-selling companies, an industry who’s [sic] relentless advertising is now staple of cable television.”

From the press release: “Under Rep. Weiner’s bill, companies like Goldline would be required to disclose the reasonable resale value of items being sold.” That’s great. Are Mr. Weiner and Chairman Bernanke also going to agree to print on every dollar the reasonable expectation that its value will be eroded by inflation?

Why don’t they require all companies selling goods to disclose the resale value? The second you drive off the lot with a new car, the value drops by about 20 percent. Why isn’t that disclosed? Of course, the goal here is not disclosure. It’s to put these companies out of business. It would be impossible for a company like Goldline to disclose the resale value in its commercial because the value is constantly changing. Is Congress too stupid to know that or so manipulative as to pretend they are looking out for consumers?