James Pethokoukis

Politics and policy from inside Washington

Gold is nowhere near its old highs

Sep 3, 2009 18:36 UTC

A great factoid from the Calafia Beach Pundit, Scott Grannis:

Gold prices peaked in January 1980 at $850. In today’s dollars, that would be equivalent to $2,300. (The chart shows a peak of $1,800 because it uses month-end data.) So in rough terms, let’s say that gold today is worth about half of what it was at the peak of the inflation fears in early 1980.

Gold prices rise when there is “too much money” in the system; when people fear that an excess of money will depress the value of their money. Gold prices also rise when people are just plain scared about something going very wrong.  …  Could gold rise above $1000? Why not? Could it get to $2000? Perhaps, but I think things would have to get an awful lot worse than they are today.


Great article. We’ve got a long way to go. Thank the Lord I’ve been stashing away bullion throughout the past few years. I really like the Pamp Gold bars and my favorite silver is the Buffalo Rounds that Scottsdale Silver sells. I live in the US, work int he US, and plan on retiring in the US. A little precious metal goes a long way to diversifying my life.

The Obama stimulus reconsidered

Sep 3, 2009 17:23 UTC

I listened to VP Joe Biden today talking abut the Obama stimulus package, aka, the American Recovery and Reinvestment Act. A few thoughts:

– Biden credited the stimulus plan for preventing the recession from turning into a depression. I would certainly place the $140 billion or so in stimulus spending behind the Fed’s action and the natural rebound in the economy after a period of intense fear and retrenchment.

– Even though “reinvestment” is part of the name of the plan, at least two-thirds of the plan has nothing to do with long-term growth.

– If the economy was much worse than the White House expected, why wasn’t a) the stimulus bigger, and b) more front loaded toward 2009?  That was a huge misjudgment.

– Clearing some fiscal space with entitlement reform would allow the WH the ability to do a second stimulus for infrastructure or reducing taxes on company and capital.

– Perhaps the smartest thing the WH has done so far is resist calls for raising taxes (like from Pelosi) or to focus on near-term deficit reduction. Those are exactly the sorts of policies that helped retard America’s recovery during the Great Depression and Japan’s during the Lose Dedade.

The consequences of massive budget deficits

Sep 3, 2009 12:38 UTC

The Cleveland Fed gives the bad news:

First, without a correction on the spending side, more tax revenue will need to be raised, with the consequence of subjecting the economy to greater tax-associated inefficiencies.

The risk of default may also increase, leading to higher risk premiums, higher interest payments, and a greater cost to be sustained in the future to address the fiscal imbalance.

In addition, a sustained demand for funds by the government sector will likely put upward pressure on future real interest rates, with adverse consequences for private investment and growth.

The increase in domestic interest rates will likely attract further financial flows from countries with higher saving rates, which may lead to a dollar appreciation and a worsening of our current account deficit.

Another vote against a super-regulator

Sep 3, 2009 12:34 UTC

Edward Harrison has an interesting and worth-reading take on financial reform :

I propose the following:

  1. Shelve any talk of a super-regulator.  It is a dangerous idea that will prove both politically unpopular and ineffective.
  2. Enforce the regulations that currently exist. For example, anti-trust law should prohibit any institution from holding more than 10% of banking assets. Another example is the Home Owner Equity Protection Act of 1994, which gave the Federal Reserve the authority to stop abusive mortgage lending practices.
  3. Promote smaller community banks. The Bush and Obama Administration’s policies during this crisis have favoured big banks. Meanwhile, community banks are being held to a disadvantage in access to cheap capital. Why doesn’t the FDIC spin off seized assets as small community banks with new leadership instead of gifting them to private equity or other banks?
  4. Regulate OTC derivatives. Full-stop.  No clearinghouses. No loopholes.  We need an exchange-traded OTC derivatives market. (listen to the audio at the bottom of this post to hear how lobbyists gutted the OTC derivatives regulation in Obama’s reform package).
  5. Keep the Consumer Finance Protection Agency. If we want any new regulators, this is where we need them.  The Fed failed to protect consumers from abusive mortgage lending practices and there is now a balkanized regulatory structure to oversee consumer protections. The CFPA would change this.

Bill Gross and America’s ‘New Normal’

Sep 3, 2009 12:23 UTC

Pimco’s Bill Gross paints a dreary future is his monthly letter:

We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

Me: The Counter-Reformation is hand. This is probably the economic consensus, especially if you toss in the probability of higher taxes.