The Barbarous Relic -- "I Just Buy It"

John Maynard Keynes, whose ideas have such an important place in modern macroeconomics, referred to gold as a "barbarous relic" in his 1924 work Monetary Reform and in a 1944 speech to the House of Lords. With the decline of the gold standard for currencies, one might think that gold is little more than a "barbarous relic", having little interest to any but jewelers, electronics fabricators, and commodity futures traders.

Yet with the decline of the gold standard for currencies, the modern world faces a situation in which central banks can create their fiat currencies at will. In the wake of the financial crisis, they have been doing a lot of that lately. If new dollars, euros, etc. are not consumed in acts of deleveraging, as they have been to some extent so far, currency holders (like you and I) may start to become concerned that their dollars, euros, etc. will become worth less relative to real things that are less easy to create. In other words, they may worry that the necessary inputs to their lives and their industries -- energy, food, metals -- will become more expensive in monetary terms.



Perhaps this is why gold the "barbarous relic" attracts interest today and often seems to trade on the basis of perceived risk rather than on the basic supply and demand, or interest rates that determine carring costs for future delivery. But given such a tenous perception as risk, would anyone want to hold gold as a significant portion of his portfolio for very long? When perceived risk is such a personal matter, what complicated strategy would one need for deciding when to buy and when to sell? For most of us, gold seems too risky itself to hold with confidence.

If we look at Commodity Online, we see that famed investor Jim Rogers said of gold "If it goes down I'll buy some more, and if it goes up I'll buy some more. I periodically buy some gold. I don't have a method to it. I just buy it."

If one thinks that recent price ranges for gold are far below future prices, then he does not need a complicated strategy for buying and selling: "If it goes down I'll buy some more, and if it goes up I'll buy some more."

So, there you have a strategy for accumulating and holding gold as a hedge for the loss of value of the currencies and other financial assets created by mere humans. The strategy is insensitive to fluctuations in price: "I periodically buy some gold. I don't have a method to it."

The deflationary forces of a deep recession give little indication of future inflation, especially as so many people are saving their dollars and buying US Treasury securities for safety now. Indeed, Treasury prices seem insensitive to the impending flood of issuance. That is the present, however. If you think that the world's reserve currency, the US dollar, will be worth much less in the future, you might want to consider other assets, such as gold, and a trading strategy. Gold -- "I just buy it".

Health Care in the US -- Inefficient and Discriminatory

No Public Option. President Obama has apparently taken the "public option" for US health care off the table -- in other words, whatever health care reform the Obama administration is able to engineer, it won't be a public program providing universal care with the Federal government as single payer.

Who Wins, Who Loses. The big health care business special corporate interests must be greatly relieved. With the help of their right-wing ideologues, they have finally paid off enough members of Congress to get their way. The American people are the real losers, because the system will not get the fundamental reform that it requires.

Why We Need Health Reform. If you need more evidence that the US health system is in need of fundamental reform, just consider the above chart from the World Health Organization, comparing the health of citizens of the US, UK, France, and Singapore. It shows how poorly the US health system performs relatively to other advanced nations.

The systems compared by WHO. The health systems in the UK and France are publicly funded, universal, and government run. The US system is half public and half private, where no one is guaranteed health coverage. The Singapore system is another part-public, part-private hybrid system, where the government provides most care for those who are least economically advantaged, and costs are variously shared between the government and the rest of the population.

Effectiveness. The US has the lowest life expectancy of the countries compared. This is no surprise, because there is little promotion of disease prevention, little outreach to those who are in chronic need, and little attention to promoting healthy life styles and good health practices. It is easy to conclude that, given the rich resources available, the US system is not effective at promoting and delivering good health.

Efficiency. Of the countries compared, the US expends the highest percentage of its GDP on health care. It is easy to see that the US system is highly inefficient at delivering health.

Equity. In the US, only 10% of non-Hispanic whites are without health insurance. 16.8% of Asians, 19.5% of blacks, and 32.1% of Hispanics are without health insurance. If the statistics divide so strongly along ethnic lines, it is clear that the US system is highly unequal.

Why the Right Opposes Health Reform. Health reform isn't welfare for the rich, that's why. Billions for Wall Street? No problem. Never mind that government programs are paid for by the people's taxes and are supposed to be for the public good. Billions for the public good? If it really helps the people, it's "socialism". Socialism for the rich is ok here.

Why Public Options Are Vilified. Ever notice how Americans say that they encourage entrepreneurial risk taking, but they only consider the upside of the risk? Rich entrepreneurs are wonderful, but if you take a risk and fail, obviously you didn't try hard enough. In fact, you are so lazy and stupid that you no longer deserve the right to life and liberty. No health care for you. Not that it's their fault, but neither do your kids. It is convenient to have people to blame.

Why Vested Interests Call It "Socialism". Powerful vested interests are trying to use twisted rhetoric to set the terms of the health care debate, and right-wing ideologues are happy to play along. It is very convenient for the powerful to taint public health systems as doctrinally "socialist", because they think that they can divert the American people from discussing the real issues at stake. If no one compares the economic and health benefits of alternative systems of organization, they won't notice how inefficient and unequal our current US system is. There really are alternatives to our inefficient, unequal system.

Why We Need a Public System. The only way to reduce health-care costs is to to provide health care consumers with the power to negotiate costs with their doctors, hospitals, drug companies, and others who provide the goods and services. This means a system of sufficient scale and create an authority that will enable private insurers to negotiate effectively ... or else let the Federal government do the negotiating itself. And the only way to promote freedom, equality, and opportunity in the US with an affordable system is to have a public health care system that provides care for all of us.

No Exit

Not the financial Terminators, we hope

Mr Bernanke's Testimony. In Congressional testimony last week, Federal Reserve Chairman Ben Bernanke tried to put to rest the widespread concerns that the Fed has no "exit strategy" from the unprecedented degree of monetary easing and fiscal stimulus currently underway. Many commentators seem greatly relieved by the Chairman's testimony, which identified many of the monetary tightening mechanisms in the Fed's arsenal. Others were not impressed.

The Fed's Tightening Mechanisms. The Fed's inventory of assets includes short-term Treasury bills, which it can sell in order to soak up excess any excess liquidity in the hands of the public and thereby reduce inflationary pressures. The Fed can also encourage banks to hold excess funds (and not loan them to the public) by raising the interest rate that it offers member banks on overnight deposits. These kinds of tightening mechanisms are well known, and it is remarkable that so many observers seemed to be reassured by the Chairman's testimony.

Near-Term Deflationary Pressures. It is true that there is little apparent risk of inflation in the US in the near term. Deflationary forces are likely to persist for some months, or longer, for many reasons. Levels of debt are very high and money entering the financial system is being used for deleveraging and not for real economic activity. Overseas holders of US Treasuries are interested in supporting their own economies by keeping their currencies low relative to the dollar, so as to encourage exports. Debtors are defaulting in increasing numbers, and levels of economic activity are still declining.

Disciples of Bush asleep at the switch again!

Long-Term Debt Problems. Despite the near-term comfort, there are very real long-term risks. The off-balance sheet obligations of Medicare, Medicaid, Social Security, and other programs are huge and growing. The US shows little political will to prevent the train wreck that will occur when runaway promises threaten to turn into a runaway debt load.

Debt Reduction Problems. To make things worse, the economy may stay weak for years, making it even harder to pay for the financial bailouts, let alone pay for expensive social programs. What if the economy is still weak when the interest load starts to become unbearable for the US? Would the Fed defend the dollar by soaking up excess liquidity and risk sending the US into another depression? A depression is hardly the time to raise interest rates.

The Financial Terminator? California's current budget problems may be a forwarning of things to come for the US as a whole. There are clear imbalances in the state's long-term obligations and its ability to fund them. However, the state's supposed budget "solution" fails to cut costs or raise taxes enough to solve the long-term imbalances already built into the system.

The similarities to the growing budget burdens of the US are worrying for the US dollar. Like an army of financial Terminators, creditors do not treat spendthrift debtors kindly.

Closer to the Breaking Point?

Darius III encounters Alexander at the Battle of Gaugamela, detail from mosaic in the House of the Faun, Pompeii

The AP reported today that the administration's annual midsummer budget update — usually scheduled for mid-July — has been put off until the middle of next month, "giving rise to speculation the White House is delaying the bad news at least until Congress leaves town on its August 7 summer recess".

The delay is raising worries that the budget update will reveal what we already know -- "higher deficits and unemployment and slower growth than projected in President Barack Obama's budget in February and update in May". The AP story suggests that the release is being delayed because it could complicate his efforts to get his signature health care and global-warming proposals through Congress.

Investors need to worry about market implications.

More economic weakness would depress stock markets and drive hot money into dollars and Treasuries as safe harbors. That has been the usual play on news of economic weakness. But everyone already knows that the economy is weaker than the Obama administration forecasted.

Besides, the current meme is the continuing growth of China, accompanied by hot money flowing into speculative markets like commodities. Maybe the risks of a surprising budget update lie in a different direction.

Real news would be to reveal an even worse position than anticipated with the Federal budget. If worries arose about the ability to fund the deficit, investors would flee Treasuries, sell the dollar, and seek safety in the traditional safe haven -- gold.

Mis-Allocated Resources

Lest we forget, one of the reasons that the financial crisis is having such a deep impact on America's economy is the lack of underlying vigor in that very economy. Make no mistake, the immediate issues relate to growing government debt, sky-high consumer debt, and the breakdown of the financial system. But would we have piled up so much debt if economic growth had been greater? Would US trade have been so imbalanced if we had had goods and services to provide that the rest of the world wanted? Would we face such a low probability of ever paying American's debts (approaching zero now) if our economy were more competitive?

One of the issues brought to the fore by the present financial crisis is the extent to which America's productive capacity has been hollowed out. Now there is no doubt that the US cannot compete against the titans of East Asia.

The US needs to fix these problems, but how? Let's look at how we got into this mess. A lot of ink has been written on the immediate financial crisis, but there is more involved than that.

Bubble after bubble has resulted in wasting this country's productive effort on assets that it doesn't need. Houses, shopping malls, internet concept stocks -- all were bubbles that wasted billions of dollars that could have funded productive, forward-looking activities. And yet there was little competition for those dollars, because little thought went into preparing the US for the future. Even as we watched the world changing around us, economic issue after economic issue was ignored while the nation blindly stumbled its way into indebtedness and obsolescence.

Yes, we have idly watched the world changing around us. First, the bombed-out industries of Europe and Japan caught up and then surpassed the US in many areas. Then undeveloped countries like China and the former European colonies caught fire and started on the path to development. If the emerging markets are developing basic industries that produce the same goods that US can produce, but at a fraction of the input costs, you know that the US has a serious challenge. US industries tried to adapt, but eventually even high tech industries migrated overseas. Emerging economies out-competed the US in autos, textiles, electronics, and other industries on which we once depended.

Once, you would have expected the US to respond to a changing world by maturing its economy to another level, either undercutting its competitors in established markets or using its technological and educational resources to innovate and develop products and markets. After World War II the US had a tremendous lead in technology, industrial capacity, research and development, and education to serve as the basis innovation.

But the US let its supposedly enduring advantages erode away. Policy focused instead on keeping Americans happy and comfortable, and not on preparing for the future. In recognition of this new role for the citizenry, we decided to refer to ourselves as "consumers" rather than as "citizens". Consumers let themselves be lulled into a false sense of security. When economic challenges arose overseas, consumers responded to an eroding standard of living first with two-job families, and then by accumulating debt.

Divisive politics fanned fears and kept voters' attention focused away from the real challenges facing the country. Concerns with debt, both personal and national, were scorned as old-fashioned. Serious coordination of economic growth was viewed as too "socialist" for a country like America. Laissez-faire doctrine ran unchecked and landed us where we are today, the victims and perpetrators of a financial crisis.

Along the way, no serious thought was given to building a long-term foundation for a growing and competitive economy. Our industrial capabilities aged and dwindled. American innovations were exploited to the advantage of nations with nimbler businesses, cheaper labor, and access to capital markets that now serve the entire world. New US growth went into service industries that fed the consumer and left the US uncompetitive.

Now that the US is saddled with growing debt loads, an uncompetitive economy leaves few alternatives for responding to the crisis. Building a competitive nation takes a long time.
Of course, the thought of investing for the future is futile now, because we cannot afford the investment. Few can afford advanced education, and the technological lead is gradually moving more overseas. If the US is becoming a banana republic economically, it is also falling toward the lower tiers in science, engineering, education, and health -- all of the things we need to build up our human resources.

Beyond the obvious low interest rates that prompted all the borrowing and the asset bubbles, what kind of errors contributed to this situation? Some are on the front pages, but others are not. Let's see . . .

Students were motivated to study for MBA and became little managers. No one wanted to be a scientist or engineer. No one wanted to do real work. No one wanted to develop new knowledge or apply knowledge to innovate new products.

What about all of the effort devoted to building bigger and bigger houses? Who really needs all of that space? Prudence was left by the wayside when people engage in consumption arms races with their neighors. Vanity and lack of regard for the future drove people to live at the edge of affordability and risk going over the edge, which many eventually did.

What could we have done with all of the resources that went into building unneeded housing space? If we had spend the money on other activities, we could have bought infrastructure, an educated work force, research and development, or modern production systems. All would have made us more competitive and furthered future growth.

It wasn't just housing. A consumer society needs lots of stores, and retail companies waged their own arms race in expanding the available shopping space. Why did the US need so much more retail space than other countries need? Was it because the citizen needed to be distracted from political reality by a fantasy world? A recent New York Times article cites the book Retrofitting Suburbia that the US had 20 square feet per capita of retail space in 2003, while the next largest amount was 13 square feet for Canada. Sweden had only 3 square feet per capita. Did we really need so much retail space? Much of it is sitting vacant now. What if we had allocated the economic resources not to the unneeded houses and shops, but rather to the activites that I mentioned earlier -- infrastructure, an educated work force, research and development, or modern production systems? Maybe we would be more productive and able to pay our bills. All it would have taken was a little thought for the future and less political exploitation of the citizenry.

Many laissez-faire extremists say that Government has no role in making such decisions. Let the markets decide, they say, and you are a Communist if you disagree. Well, there are no historical data to support their extreme position, and we now see what lies those deluded extremists told. We see what hate they fomented to distract the electorate and hold onto their power. Sure, we need individual initiative in the economy, but it is now obvious that some government coordinating role is absolutely necessary. Unfortunately, whatever the way forward, it will be a long time before America digs itself out of the debt hole.

The Yuan Takes a Step Forward

It didn't make much of a ripple in the news at the time, but a couple of weeks ago Chinese regulators approved HSBC and Bank of East Asia as the first foreign banks to sell yuan-denominated bonds in Hong Kong.

A spokesman for HSBC China characterized sales of yuan bonds as provding a benchmark that other banks can use for yuan trade settlement, and a spokesman for Standard Chartered in Hong Kong said that the move will promote yuan liquidity. Benchmarks and liquidity will support China's goal to increase the use of the yuan for trade and investment, and to reduce risks of dependency on the US dollar.

As reported on Bloomberg, China announced a pilot project on April 8 to allow international trade settlement in the yuan in Shanghai and four cities in Guangdong province. Although Hong Kong's official currency is the Hong Kong dollar, bank deposits denominated in yuan have been accepted in the city since 2004.

If the process continues, China will eventually establish the enviable position of routinely settling international trades in yuan. Readily pricing trade goods in yuan would reduce China's need to maintain a narrow band on the exchange rate with the US dollar.

While the ability to sell yuan bonds in Hong Kong is hardly the same as making the yuan freely convertible to other currencies, it is a step in that direction. Given the rapid economic growth of China, it seems only a matter of time until the yuan is established as a major international currency. Such an event would be another step in the gradual but inexorable process of lessening the world's dependence on the US dollar as the common unit for pricing in international trade.

Over time, that will mean yet greater erosion in the premium that international banks and traders place on holding dollars -- i.e., more dollar weakness and a decline in American influence relative to developing countries like China.