Would-be billionaires often say they’re discouraged by high tax rates. For example, the British Venture Capital Association complained the UK’s increase in the tax rate on capital gains to 28 percent, would damage capital formation. The latest World Wealth Report from Merrill Lynch and Cap Gemini suggests otherwise.
The report looks at what used to be called rich people, who are now known as high net worth individuals (HNWI). The cut-off is investible capital of $1 million.
The search by global investors for safe havens is looking increasingly desperate. Net foreign investment flows to long-term U.S. securities were $141 billion in March, the most since records began, of which $108 billion was into Treasuries. Rather than a touching sign of confidence in Uncle Sam, this may derive from a more simple consideration: there’s nowhere else to go.
March saw rapidly rising investor concern about Greece’s debt position and the future of the euro, so it was not surprising that flows into American securities increased sharply. Even so, the U.S. budget position is not hugely superior to Greece’s — although its debt levels are lower — and there is as yet little action to improve it. So the flow to U.S. Treasuries, most of it from private investors presumably with other choices, is surprising.
It sounds like a gold bug’s dream. But looking back to the last inflation-adjusted peak price in 1980, it’s far from impossible that the gold price could soon go above $5,000 an ounce.
The potential level of a new peak can be estimated in several ways. Based on consumer price inflation, the $875 per ounce high seen in 1980 is equivalent to around $2,400 today, almost twice the current gold price. But there’s a case for taking account of economic expansion as well as price inflation.
The world’s economic output has increased about six-fold since 1980. Scale up the peak 30 years ago by that multiple, and the gold price could top out at around $5,300.
Gold can also be regarded as an alternative to money. Broad global money supply, known as M3, is now in dollar terms about 10 times what it was in 1980. The total gold supply has also increased to some 170,000 tonnes from 110,000 tonnes over the same period as more of the metal has been mined. Scaling up by money supply and deflating by the gold supply, the 1980 peak price would be equivalent to about $5,700 an ounce today.
Looking at money supply another way, today’s potential gold price would be a bit lower than that. A narrower measure of global money, M1, is currently estimated at about $17 trillion. If the 170,000 tonnes of gold mined through history were to substitute for this, the gold would be worth around $3,100 per ounce. But that wouldn’t account for the tendency of the thinly-traded gold market to overshoot sometimes to the upside, as for instance in 1980, and sometimes to the downside.
Of course, there is a considerable chance that gold and other commodity prices will peak at a lower level. But if a four-fold increase over a couple of years from today’s gold price to more than $5,000 an ounce seems impossibly extreme, that was the trajectory in 1978-1980. If governments continue to print money, whether for economic stimulus or to stave off defaults by themselves or others, fear of widespread currency debasement and the consequent inflation could create the conditions for just such a spike.
The credit crisis would not have been as bad if investment banks’ risk management systems worked well. But the systems rely on sophisticated mathematical models that have a fundamental flaw — they grossly underestimate “tail risk”. This problem can be solved fairly easily.
In a way, this is a higher technical dispute, about the arcane details of the calculation of Value at Risk (VaR), the prime measure of the riskiness of trading books. To non-mathematicians, the possible answers sound daunting: Gaussian, Cauchy, and Pareto-Levy. But the underlying question is straightforward: how often and how badly do markets blow up?
The Works Progress Administration was established 75 years ago on April 8, 1935. The U.S. job-creation program left many happy memories among fans of big government, as well as some physical reminders of its accomplishments, from post office murals to 650,000 miles of roads. Over the last year long-term unemployment in the United States has doubled, to 6.5 million people. Is it time for WPA II?
The first WPA absorbed 2.1 percent of the nation’s GDP from 1935 to 1941. The money went to pay workers who had been unemployed for years to work on a wide variety of projects. Nearly half was spent on infrastructure of long-term value, including unglamorous sewers as well as Connecticut’s elegant Merritt Parkway.
By Martin Hutchinson and Rob Cox
Janet Yellen has a reputation as a monetary dove. After all, she thought deflation a risk when she became president of the San Francisco Federal Reserve, and has suggested inflation may be too low now. But Ms. Yellen displays hints of talons beneath her feathers that could change the way the central bank does business.
Of the three new possible Fed governors to be proposed by the Obama administration, Ms. Yellen would be most influential in setting monetary policy. As a member of the Federal Open Market Committee she universally voted with the majority, but has hinted recently she thinks inflation is undesirably low – running below 2 percent.
There are tough political obstacles to the creation of a European Monetary Fund. But if the relevant treaties can be amended or skirted, such an organisation could effectively address the euro zone’s central problem: the lack of fiscal policy coordination.
When the euro was founded, commentators pointed out that the Maastricht criteria for fiscal policy were too weak to ensure proper coordination, leaving profligate countries free to endanger the system. Euro-sceptics predicted either doom or an unacceptable surrender of sovereignty to a central fiscal authority.
A raft of the 50 U.S. states has a variant of Greek flu. Sure, they don’t have imbalances on the scale afflicting Greece. Still, some states’ weak fiscal management has been badly exposed by the downturn. Defaults aren’t unthinkable. But as with the EU’s backing for Greece, the federal government would probably ride to the rescue.
U.S. states are far more economically integrated than the euro zone economies, where a lower degree of integration means major imbalances can develop. For instance, during the boom wage costs in Greece and Spain grew much more rapidly than in Germany, without corresponding increases in productivity, making those countries uncompetitive.