Michael E. Newton's Blog, page 30

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.

Was the 2010 election a referendum on Obama or a return to republicanism?

:

Big election losses suffered by Democrats were "first and foremost" a reflection of the economy's weakness rather than a wholesale rejection of his policies, President Barack Obama said on Sunday.

"The party in power was held responsible for an economy that is still underperforming and where a lot of folks are still hurting," Obama told the CBS program "60 Minutes" in an interview.

Additionally, many are calling this Obama's Watergate.

If Obama is correct that this election was a reaction to the weak economy and the political analysts are correct in comparing this to Watergate, a reaction to corruption and political heavy-handedness, we are little better off than we were before the election. We may have better people in Congress, or maybe not, but does this election reflect a change in the American people?

It is my hope that the election was about more than just the economy and more than just a reaction to Obama's over-reaching. It is my hope that the election was about the direction of this country more than it was a referendum on the last two years. I hope this election was a reflection of the American people's desire for a restoration of the Constitution and a return to republican ideals.

Most likely, the election reflects both dynamics. The Obama backlash will only be temporary, lasting one or two elections. To ensure that the 2010 election is the start of an American reawakening, we must double our efforts in promoting the Constitution and republicanism.

The Absurdity of Minimum Wage Laws

The current minimum wage in the United States is $7.25 per hour. However, many states have imposed their own minimum wages because living in those states is more expensive. California, for example, has a minimum wage of $8.00. So why not get rid of the national minimum wage and let the states set their own? The Constitution gives the federal government no such power and this should be left to the states.

But even the states have a problem with minimum wages. Within a state, it may be more expensive to live in one city than another. For example, it is much more costly to live in San Francisco, where the minimum wage is $9.79, than in Fresno. So why not have each city set their own minimum wage as is being done in San Francisco? Why hasn't New York City raised its minimum wage as it is certainly more expensive to live in  New York City than in Buffalo.

But wait. Even within cities there can be a big disparity in the cost of living based on neighborhood. It is much more expensive to live in Manhattan than it is in Queens. Even within Manhattan, it is more expensive to live in the Upper East Side than in Washington Heights. Even within neighborhoods, the cost of living in different buildings varies.

All this may seem quite absurd, but so is the minimum wage. Each person is an individual with their own needs and wants, their own cost of living. Broken down logically, each person has their own minimum wage at which they are willing to work. In other words, no government law can boost the minimum wage of all people. Or more accurately, we would need millions of minimum wage laws to help each state, each city, each neighborhood, each street, and each person or small group of people.

In reality, minimum wage laws creates winners and losers. Those whose incomes increase will benefit from the minimum wage, but at the same time those who can no longer produce enough profit at the increased wage will lose their jobs because of the minimum wage. And all consumers will pay more for goods and services as the government forces up wages.

The minimum wage sounds great in theory (for employees, not employers). Unfortunately we live in a reality where a minimum wage does more harm than good.

Irish bonds fall, CDS and insurance rates hit new highs. Spain's economy suffering. Sovereign debt crisis continues.

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.

Worldwide backlash against quantitative easing.

Apparently, I'm not the only one concerned about the Fed's quantitative easing.

Yesterday, I wrote a piece: Quantitative easing. What is it good for? Absolutely nothing!

Today, we get similar sentiments from around the world:

Backlash against Fed's $600bn easing
Brazil ready to retaliate for US move in 'currency war'
U.S. dollar printing is huge risk -China c.bank adviser
Germany Concerned About US Stimulus Moves

Could this move turn out to be a modern-day Smoot-Hawley? For those of you who are too young to remember, the Smoot–Hawley Tariff Act was passed in 1930, raising tariffs, and being a major contributor to the Great Depression.

Congressman Warns 'We're Greece' in a Few Years

Part 10 on the sovereign debt crisis. CNBC reports:

If the US government doesn't act soon to reduce the deficit and debt, it will become like Greece in a few years, Sen. Judd Gregg, (R-N.H.), told CNBC Wednesday.

"This nation is on a course where if we don't do something about it, get federal situation, the fiscal policy [under control], we're Greece. We're a banana republic," said Gregg.

"Our status as a nation is threatened by what we've got coming at us in the area of deficit and debt. And it's only a few more years, at the most, that we have to work with here before the market says, 'Sorry, your currency is something we can not continue to defend.' "

"You've gone from 20 percent of GDP to 24 percent of GDP headed toward 28 percent of GDP. That has to be brought under control or basically we're going to bankrupt the country."

The sovereign debt crisis is not just a European problem. The US is deep in debt and many US states are on the verge of default and have already resorted to issuing IOUs. Remember, this crisis began in Greece. It then spread to Spain and Portugal. Now Ireland is even worse than Greece was before the EU bailed them out. We should not assume that the crisis will magically end today for no apparent reason. This crisis will get worse until the infected countries, which is most of them, solves the problem. The sovereign debt crisis will remain as long as economic growth remains slow, debt remains high, deficits remain large, and government remains larger than it ought to. In other words, this sovereign debt crisis will be with us for a while.

Irish bond premiums higher than Greece's before its bailout. Sovereign debt crisis continues.

Lost in all the news of the election and quantitative easing, the sovereign debt crisis is getting worse. Marketwatch reports:

Investors are dumping bonds in Ireland and Greece in a reprise of the sovereign debt crisis that shook global markets six months ago, as political infighting threatens to stymie budget reforms in the most debt-strapped countries.

On Tuesday, Irish credit costs surged to a record high and bond prices tumbled, after the reported resignation of Jim McDaid, a member of parliament for Ireland's Fianna Fail party, added to worries the government would fail to muster the votes for planned spending cuts and tax hikes totalling 15 billion euros ($21 billion.)

Credit-default spreads for Irish sovereign debt jumped 22 basis points to 5.20 percentage points, and hit 5.30 percentage points, a record high, said Markit. The gain means it costs about $520,000 a year to buy five years of default insurance for $10 million in Irish government debt.

The surge in Irish credit fears was echoed in higher costs to buy protection on debt of other so-called "PIIGS" countries. Greek CDS widened 15 basis points to 8.45 percentage points, while Portuguese CDS gained 8 basis points to 4.02 percentage points. One basis point is 1/100 of a percentage point.

Ireland's 10-year bonds tumbled, sending yields up 19 basis points to 7.17% and further widening the gap with benchmark German bonds, which yielded 2.47%.

Yields on 10-year Greek government bonds surged 10 basis points to 10.67%. Selloffs in Greek and Portuguese debt were in full force last week when their governments' own budget initiatives came into doubt.

Bloomberg takes a more dismal outlook of the situation:

Irish Finance Minister Brian Lenihan may have just one month to stave off an international bailout.

The extra yield that investors demand to hold Irish 10-year bonds over German bunds surged to a record today as Lenihan tries to put together a 2011 budget by Dec. 7 that convinces investors he can get the country's finances in order.

The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April. That's putting pressure on Lenihan to cut the deficit and overcome both an economic slump and the rising cost of bailing out the country's banks.

This is huge, but nobody is talking about it. "The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April." Ireland can fall apart at any minute but the market and media is totally ignoring it. Forewarned is forearmed.

Quantitative easing. What is it good for? Absolutely nothing!

The Federal Reserve "unveiled plans to purchase $600 billion of Treasurys by the end of June 2011 to revive the economy."

Maybe one of my readers can explain to me how the Federal Reserve buying Treasury bonds will "revive the economy." I just don't get it. The Federal Reserve will be doing nothing more than printing Dollar bills and exchanging those Treasuries. Nothing of value will be created. No new goods will appear on the market. No jobs will be created. Simply put, Treasury bonds owned by individuals or corporations will be replaced by Dollar bills.

Owners of Treasury bonds own them because they want to save/invest their money. Buying the bonds from these people won't convince them that they need to spend what they had been saving. They will simply invest their money elsewhere: in stocks, corporate bonds, overseas, gold, or in cash. No real wealth will be created through this so-called quantitative easing and it will not encourage any wealth-creating activities. It is simply moving money from one pocket (Federal Reserve cash) to another (Treasuries bonds) from the government's perspective and the converse from Treasuries to cash from the people's perspective.

The argument is that buying Treasuries will help keep interest rates low. But who benefits from this? Investors/savers will earn less on their deposits/bonds, but creditors (corporations, mortgages) will pay less interest. But those two will largely offset each other. No net benefit.

In the end, there is one entity that has so much debt that it will be the largest beneficiary: the United States government. Instead of paying interest on bonds, the government is choosing to print money instead. On $600 billion of intermediate-term debt yielding between 0.33 (2-year yield) and 2.57 (10-year yield) percent, the government would "save" about $600 million a month. That's it? With a deficit running at about $125 billion a month, that's just 0.5% if the deficit. Again, what for?

The Federal Reserve is simply manipulating the economy for no real purpose. Oh yes, it has the purpose of enabling the government to spend with reckless abandon and run large deficits because it now has a ready market for its debt. But to do so, it must print all those Dollars, and that is driving down the value of the Dollar which is very evident by the huge rally in gold since the "Great Recession" began.

The government is destroying OUR long-term prosperity for ITS short-term gain. A good deal for the Federal Reserve and the Treasury Department, but not for you and me.

Congrats GOP. Now what do we do?

Congratulations to the GOP. They accomplished a historic election victory. The largest change in government since 1948.

However, I continue to fear for this country. Not because of the politicians, but because of the people. Of the 40-50% of those eligible to vote who actually voted, how many voted for liberty and limited government? The GOP won about 54% of the total vote, so maybe 54%. Maybe more, maybe less. But considering the majority of people didn't even bother to vote, you are looking at a very small portion of the population who understands and cares enough to vote in favor of liberty and limited government. The number is 30% of the population, at best. Probably closer to 25% or even lower.

That is a very disappointing figure. While we must be involved in the political system, that will only help us on the margin. If 25% of the population supports limited government, nominating attractive candidates may boost that to 26% or 27%. Enough to temporarily defeat the political opponent, but not enough to fundamentally change our country.

The only long-term solution is education. We need to further the ideas of liberty, limited government, and checks and balances.We need to read, we need to write, and we need to share. With Amazon.com and social media, we have the tools to spread the knowledge. All it takes it effort.

So, now that the election is over, we have three main jobs:

Make sure that government officials from both parties work toward smaller government.
Begin recruiting for the next election.
Educate ourselves and the public as to the benefits of limited government and checks and balances as described by our Constitution and elaborated upon in the Federalist Papers.

As you know, I'll be focusing on the third item. I've already written one book warning the people of the evils of big government and the democratic demand for free gifts from the government. Many of you already know that I am working on a second book, the topic of which has not yet been announced. I have many more books planned, each of which advances the cause of liberty.

But while I will concentrate on the education portion, I will not be ignoring the first two parts. I will remain active in the political arena to ensure our governments (federal, state, and local) limit their size and scope and to help choose future candidates for political office.

We have a lot of work ahead of us. It has taken 100 years for our government to go from a very minor portion of our society to the huge behemoth it is today. It may take 100 years to reverse what has been done and we may not be alive to see our success. But succeed we must for the fate of our country and the world depend on us.

Eleftheria i thanatos!

NOV 2 Prediction. A Republican tsunami! My official election prediction for the House of Representatives.

It's election day and I am assuming there won't be any more polls coming out. So now it is time to make my final election prediction for the House of Representatives. For those who have not been watching, this is not my first prediction.

Here is my prediction from October 22. GOP gain of 61 seats.

Here is my prediction from October 24. GOP gains 78 seats.

Here is my October 29 prediction. GOP gains 72 seats.

First a review of how I make my prediction.

I simply take the RCP average of Generic Congressional Vote as my baseline. I adjust their vote totals to assume the GOP and Dems receive 100% of the vote (ie. no third parties win any seats). Then, I have three models to convert vote totals to House seats.

40-year model: Regression of House seats vs. vote total for every election since 1968.

8-year model: Regression of House seats vs. vote total for every election since 2002. Because of the increase in partisanship and computerized gerrymandering, there are now many more safe seats.

1994 & 2006 model: In these two mid-term elections, control of the House switched sides against an unpopular President. The same will likely occur this year.

The models produce the following results:

40-year model: Republicans win 268 House seats, gain of 90 seats.

8-year model: Republicans win 247 House seats, gain of 69 seats.

1994 & 2006 model: Republicans win 253 House seats, gain of 75 seats.

Taking a simple average of the three, I now predict the Republicans will win 256 House seats, a gain of 78 seats.