WayBack Machine 1999: Who Needs Gold When We Have Greenspan?

The irony in this piece is just too good.  

This is almost a template for the anti-gold 'hit pieces' that have appeared almost every year since 1999, put out by the gold bogeys. 

I wonder what people will be saying ten years and five or six more iterations of QE from now?

NY Times
Who Needs Gold When We Have Greenspan?
By Floyd Norris
May 04, 1999

Is gold on its way to becoming just another commodity? The people who run the world's financial system are doing their best to secure that fate for the metal that once was viewed as the only ''real'' money.

"I want to say one word to you. Just one word. Derivatives."

The process of removing the glitter from gold has been a gradual but inexorable one, and is one of the most telling counters to the argument that national governments are less important in this era of globalization. Much of the world is now quite happy to accept the idea that a greenback backed by Alan Greenspan is just as good as one backed by gold.  (And if they are not happy, send in the drones.  The bombings will continue until they are giddy with joy. - Jesse)

Certainly gold's reputation as a store of value has eroded. At the peak of the gold frenzy in 1980, an ounce of gold cost $873, precisely that day's level of the Dow Jones industrial average. Now the Dow is at 11,014.69, about 38 times higher than the $287.60 price of gold.  (and today the Dow is 12, 830 and gold is $1,730. - Jesse)

Actually, that measurement understates the amount by which stocks have outperformed gold. If you had owned stocks all those years, you would have received substantial dividends. If you owned a lot of gold, you got no dividends but did have to pay storage fees for the stuff.  (And if you do business with Wall Street you may be paying storage fees on gold that is not even there. - Jesse)

That is, in fact, how the central bankers of the world look at gold these days. Michel Camdessus, the managing director of the International Monetary Fund, said last week he expected the fund to sell gold for the first time in two decades.  (And how many more times have they said this in the past twelve years?  Jesse)  The Clinton Administration is pushing for such sales by the I.M.F. to help finance a laudable program to forgive debts owed by very poor countries. 

The money received from the gold sales is to be invested in Government securities that will provide income, and that income will pay off the loans. The implicit assumption is that gold, which does not pay interest, is a lousy investment.

A couple of weeks ago, the Swiss electorate voted to begin untying the Swiss franc from its gold backing. The Swiss central bank could begin selling gold as early as next year. Once again, the argument was that selling gold was a way to find easy money for good deeds. To those who still view gold as the only real money, having the Swiss defect is a bit like discovering that Rome is embracing Protestantism. It is the last place that should happen.

But it is happening, and it seems likely that more central banks -- like the Australian and Dutch banks -- will join those that have already begun selling gold.

We have taken the risk out of trading (for ourselves).

The argument against retaining gold is that its day is past. Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.  (Gold bad, CDS good.  Nice trade...if the government is backstopping your enormous losses. - Jesse)

Once gold served as protection for investors against governments that debased their currencies. Now there is plenty of debasing going on -- the Brazilian real is down 27 percent this year -- but the lesson people have drawn is to believe in the dollar. There is growing support for the idea that all of Latin America should adopt the dollar as a currency.

Dollarization, as that idea is called, amounts to a sort of a gold standard without gold. There would be a universal money whose value was based not on gold in the vaults, but on the wisdom of Mr. Greenspan and his successors at the Federal Reserve. (In cyberspace, no one can hear you screaming - Jesse)  Few fear that one of those successors might resemble G. William Miller, the Fed chairman in the late 1970's who seemed to have no idea how to slow inflation.

If the demonetization of gold continues, the price is likely to keep falling as central-bank sales more than offset any increase in demand from jewelers or industrial users. That could change if it turns out that central bankers are not the geniuses they are now deemed to be. But for now, the world believes in Mr. Greenspan and sees little need for gold.  (And now you can sleep well and believe in Timmy and Ben. Got gold, bitchez? - Jesse)

Money For Nothing Exclusive Clip - "Maestro" from Liberty Street Films on Vimeo.

US Tax Brackets Spread For the Past 100 Years and the Concentration of Economic Decision Making

In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system. Here is a history of the 'brackets spread.'

These are the nominal rates and do not account for tax shelters and deductions. This also does not include non-income taxes such as the federal gasoline tax.

Below this I also include a chart that shows the share of income obtained by the top 1%. I am not necessarily implying that low tax rates on the wealthy leads to a greater share of income for them, in a causal manner.

I think it is a correlation, that low tax rates for the wealthy are an artifact of their increased political power because of wealth obtained by other means, whether it be through monopolies, changes in public policy, cartels, financial fraud, technological change, and quite often corruption.

There should be little doubt from the last chart that the great turning point occurred during the Reagan era, but that it also obtained a 'second life' during the second term of Clinton and the beginning of the twin financial bubbles in tech and housing.

What was damaging in the Reagan philosophy was not so much any change in tax rates, but the promotion of the idea that the rule of unfettered markets was naturally superior to the rule of law, with beneficial effects for everyone. What this ignores is the tendency of unregulated markets to duopoly, monopoly, cartels, frauds and spectacular failures.

I hypothesize that not only does 'supply side economics' not work, but rather, a concentration of wealth and political power in the top one percent actually tends to drag down the overall well-being of the country in terms of robust growth and median standards of living.

This concentration of economic decision making tends to 'starve' the real economy by dampening aggregate demand, and distorting investment from the real to the artificial, particular, and ostentatious, in the manner of many third world oligarchies. It is similar to the concept that decisions made across the broadest number of market participants tend to be the most correct.

This is a somewhat counter-intuitive observation, that a ruling elite tends to 'get it wrong' as compared to a more broadly based decision model in a transparent information model, because their perspective tends more to distortion and group-think as compared to one that includes a reasonably educated and informed middle class. In other words, for all its flaws, democracy works when information flows.

Oligarchies never work, because benevolent dictatorships are mythical for many of the same reasons as the naturally efficient markets model.

Or as Lord Acton put it so succinctly some years ago:

"Where you have a concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that.

Lord Acton

There are two major models for recovering from such a situation: the Japanese model and the Swedish model, with a number of variations.

The Japanese model attempts to hold the financial structure largely intact, diverting huge amounts of policy action and public funds to supporting 'zombie banks' and interwoven corporate cartels. This led to a protracted period of stagnation.

The Swedish model is to nationalize, reorganize, reregulate and reform the financial sector into a more benign banking system. This has proven to be more successful in several instances, including Iceland more recently.

It will be interesting to see how the next ten years play out in North America and Europe.

h/t Barry Ritholtz

Source: WSJ
Looking Past Fiscal Cliff to Fixing Taxes
By Gerald F. Seib

Let's imagine you just landed from Mars and discovered that America's political system is in gridlock, and its economy is being held hostage. What, you would ask, is the giant problem creating all this trouble?

The big dispute, you would discover, is over whether the top individual marginal tax rate should be 35% (the rate established under George W. Bush) or 39.6% (the rate under Bill Clinton).

That is an oversimplification of the issues that are driving Washington toward the so-called fiscal cliff, of course. Still, that top rate is at the heart of the roaring economic debate.

Read the rest here.

Top 1% Share of the Wealth of the US During the same 100 Year Period

A Closer Look at the SP 500 Futures Daily Chart