Gold Index Page

Contents
Main Page
Krugerrands
Krugerrands For Sale
Krugers by Date
Half Kruger Dates
Quarter Kruger Dates
Tenth Kruger Dates
Proof Half Krugers
Sovereigns
Sovereign Information Sovereigns For Sale
Year 2000 Sovereigns
Gold Bars
Bars Information
Bars For Sale
Half Sovereigns
Half Sovereign Information
Half Sovereigns For Sale
Year 2000 Half Sovereigns
Buying
We Buy Gold Coins
About Us
About Us
Our Selling Terms
Order Form UK
Order Form USA

Gold News & Press Comments
Our partial index of news and press articles about gold or coins.

Why The Stock Market Tanked
David Ranson, Forbes Magazine (forbes.com), 8th August 2011
Only gold can issue an unbiased rating of the federal government's creditworthiness.

Read the Subtitle
We like the sub-heading of this article, which would be all a busy reader needed, however the rest of the article is worth reading, and very soundly argued.

Why The Stock Market Tanked
David Ranson, 08.08.11, 04:30 PM EDT
Only gold can issue an unbiased rating of the federal government's creditworthiness.

The stock market's 1000-point setback, echoed the world over, has been a shock and a puzzle. Following a tripartite debt-control agreement in Washington, how could the economic situation be worse than before? I begin with a suspicion that the much prayed-for "deal" was a pretense. On Aug. 1, all three negotiating groups concluded that their time had finally run out. Though they had gotten nowhere, they declared a victory simply by announcing agreement.
The gridlock that has exercised the media over the past months is now set to continue inside the twelve-member select committee authorized by the "deal." Between them, these twelve won't have any more teeth than the debt limit itself did. Even if, miraculously, they were to come out with the right stuff, neither house of Congress, and neither political party, is obligated to ratify it. Now the debt limit has been raised, but the warring sides are back in the same positions they had staked out all along.
Credit-rating agencies have gotten most of the press in recent days. Standard & Poor's was brave (or foolish) enough to stick out its neck and downgrade long-term federal debt from triple A to double-A-plus status. The adjustment was no more than symbolic, and long anticipated, but it stung. Either here, in Europe or anywhere else, how could the rating companies help being political in the context of a sovereign debt crisis? Their actions or inactions play a unique role in the whole debt mess, just as they did during the financial crisis.
Only one institution, I argue, is capable of issuing politically unbiased ratings of the U.S. government, and that's the market for gold. The dollar/gold price is simply the inverse of the value of the dollar in terms of un-depreciated money. De facto, this is the markets' own rating instrument: an evaluation of the government's balance sheet. Not only did gold effectively downgrade the federal government's creditworthiness, but it did not wait until the last moment as S&P did. For years gold has been pricing the dollar down, as far back as 2001 when it traded at $250 /oz.
If the debt-control fight had any purpose, it should have been to produce specific and orderly cuts in federal spending, a plan with teeth. The markets can see that wasn't the deal. On the morning of the Treasury's deadline the price of gold reached a new record, and other "physical" asset prices followed it up. Gold rose to further highs after the stock market plunged, and again the following Monday. Cumulatively it's been a dollar depreciation of over 85% in nine years: a lot more than symbolic. Translated as a credit downgrade, it gives the Treasury no claim on investment grade status at all.
By pushing down the Dow by 500 points, perhaps investors were expressing disillusion with the phony resolution of the debt-limit crisis. But if they were digesting that and delivering a no-confidence vote, they were puzzlingly tardy. Let's not miss one big clue: namely, the timing of the August 4 plunge. It was on the very next day that S&P announced its downgrade. It wouldn't surprise me if the S&P decision leaked out: rumors traveled, and stock markets panicked one day early.
Ironically, prior to the Treasury's Aug. 2 deadline, observers interpreted the stock and bond markets' relative calm as an expression of confidence that a default catastrophe would be averted at the last minute. According to the politicians, of course, that's what happened. But at the beginning of August CDS prices for five-year Treasuries spiked at 65 after fluctuating for months within a trading range between 40 and 50. That demonstrates a material chance of federal default. A better explanation is that capital markets were signaling quite the opposite of political wisdom: that a default would be no big deal.
This was not the first time the nation has been warned that it was on the edge of a precipice. There are two strong arguments to suggest that much of what the public was told prior to August 2 was specious. First, default would only have occurred if the Treasury had precipitated it. In the event that the debt limit were not lifted, the Treasury would have had some leeway under the law to pay certain obligations on time and others slightly late. It would surely have opted to give priority to servicing the debt. If so, the prospect of default (though inevitable eventually) was far less imminent than Washington insiders were telling us.
Second, a default would have meant little more than an increase in the government's expected borrowing costs. The act of default does not automatically cut off access to borrowing, especially if everyone knows it is only technical and the result of self-imposed political choices.
No-one can visualize the hypothetical implications of a default in detail. It would admittedly create headaches for an awful lot of people ranging from banks to pension funds and the Bank of China. But most important to U.S. politicians and policymakers, there would be an enormous loss of face on their part, as a default would rightly reflect on their collective competence. The thought of default is intolerable in Washington, and that may be why the warring parties put aside their long-drawn-out dispute when they did. No doubt many politicians sincerely believe that Washington's loss of credibility would bring the private economy down with it. That's just collective ego talking, and bad economics.
Rarely addressed is the question whether the economy benefits from either artificially low pricing of credit or posting unrealistic ratings of credit quality. Policymakers presume that the nation is better off when government can borrow unlimited funds at the lowest imaginable rates. I claim that this is bad economics too. If capital is misled, it won't flow to its highest and best use. Then everybody loses. As a nation we are better off if the interest rates paid by the Treasury, and the ratings granted government securities by rating agencies, all honestly (and far-sightedly) reflect the creditworthiness (or not) of the government. In giving birth to the undue fear of default, Washington's (ego)-centrism is coupled with the cardinal fallacy of demand-side economics: the presumption that "aggregate demand" (especially in the form of government spending) drives economic activity when the private economy is weak. Common sense should tell us that demand cannot be effective unless it is financed by income, no income exists without the employment of resources, and no resources will be employed without a continuing inflow of capital. Furthermore, without taxes from the private sector, the government has no capital, no resources, no income and no effective demand.
I go with Hayek, not Keynes: demand management is bad economics. The source of national economic wellbeing is not "stimulus," but private capital and enterprise. And capital is, effectively, on strike until there is an honest alleviation of the debt crisis. So, in the medium term, prosperity may be out of reach.
Wall Street was displaying its own (ego)-centrism when its "leading chief executives" asserted in a letter to the president in late July that either a default or a downgrade "would be a tremendous blow to business and investor confidence--raising interest rates for everyone who borrows …" Inexcusably bad economics. When any one borrower is viewed to be less creditworthy, that increases the access to borrowing of better credits. Other things equal, the interest rates paid in the private sector will be lowered as those paid by the government are raised. Recall that, in the past, yields on government bonds were always lower than those on the highest rated corporate debt. That era is over.
In this instance it's a mistake to assume that what's good for Washington is good for the economy--the opposite is more plausible. From the perspective of classical economics, the more capital the federal government absorbs to keep its spending from being cut, the less capital is available to the private sector to create sustainable growth and jobs. The federal government and the private economy are always competing with one another for capital. Borrowing by government crowds out borrowing by businesses and consumers. Well-deserved constraints on federal borrowing are going to alleviate that crowding out.
Legitimate restraints on federal spending and federal borrowing (such as a realistic downgrade) are not a cost to the private economy, but a benefit. To the extent that financial data present the government as more creditworthy than it really is, the federal government can grow at the expense of the economy as a whole and continue to stifle the private sector. It is federal spending that is reckless, not attempts to restrain it by invoking the debt limit or downgrading the debt.
Several observers have noticed that, post-downgrade, there has been no haircut for the holders of Treasury bonds. Their prices actually went up slightly. This does not show that downgrades are irrelevant, only that their effects may be smaller than other influences on bond pricing such as a plunge in the equity market and a flight to liquidity.
I can see no reason to believe that a debt downgrade has been, or will be, a disaster. It has merely set off a panic, prepped by "Armageddon" rhetoric from Washington. If that is right, then the stock market will climb back as it usually does after it is startled and, as that happens, Treasury yields will be on their way up again. The outlook for slow growth plus inflation has not improved one whit since politicians called off their fight over raising the federal debt limit. The economy was going nowhere before, and it is going nowhere now. Ink has been spent, and passion vented, in copious amounts--to what purpose?
David Ranson is head of research at H. C. Wainwright & Co. Economics Inc.

Why The Stock Market Tanked
Why The Stock Market Tanked

 


"Tax Free Gold" website is owned and operated by Chard (1964) Limited
32 - 36 Harrowside, Blackpool, Lancashire, FY4 1RJ, England. Telephone (44) - (0) 1253 - 343081; Fax 408058;
E-mail: Contact Us  The URL for our main page is: taxfreegold.co.uk

EV SSL Certificate