The price of gold simply reflects the value of the dollar, real or perceived, but more about that in a moment. So, if gold is $1,400 per ounce, it simply means that the dollar has a value of one 1,400th of an ounce of gold. If gold was around $800 per ounce two years ago - and it was, this means the dollar has lost significant value as a store of wealth.
What causes the value of the dollar to decline so dramatically? The perception, justified or not, that the dollar is losing purchasing power. In this case, that perception is justified. The dollar, and for that matter the currency of most nations, is controlled by the government acting through a central bank. In the United States, the central bank is the Federal Reserve. The role of the Fed is to stabilize prices (viz., avoid inflation or deflation). When the central bank thinks its task is to stimulate the economy, it necessarily abandons its role as price stabilizer. Thus, if the government, acting through the Federal Reserve, or otherwise, creates more money, it has the effect of devaluing the currency. The brightest member of Congress on economic matters, Representative Paul Ryan says, “It’s a fatal conceit. We’re undermining the precepts of sound money.”
This is because an economy, such as that of the United States, has a finite amount of goods and services available at any specific point in time. Increasing the supply of currency available for circulation in that economy, without a corresponding increase in goods and services available, has the effect of requiring more of these “new” dollars for the purchase of a given good or service. Which is another way of saying that the purchasing power of the dollar has declined. If your earnings or cash flow fail to increase accordingly, you effectively are becoming poorer.
The latest action by the Fed is called quantitative easing, or QE2 because it is the second time in recent months that it has undertaken this action. Simply put, the Fed created $600 billion out of thin air to disburse into the economy by purchasing government IOUs, (i.e., Treasury securities). This added money is not matched by an increased amount of goods and service; thus, it eventually takes more dollars to acquire a given service or good.
This is clear where the price of gold is concerned. In and of itself, it doesn’t grow in value; it’s still just an ounce of gold. Instead, the value of the currency is shrinking so that more dollars are needed to acquire an ounce of gold. This is a means of hedging against anticipated inflation, or the increasing cost of a given good or service because the value of the currency is shrinking. Why does the government create this “funny money” when, among other ills, it has the ultimate effect of eliminating the dollar as the international standard for global commerce? It does it because, more and more, it needs it to finance he rapidly expanding fiscal deficit created by its continual usurping of the activities of the private business sector. It finances this by creating “funny money” ala the Federal Reserve or confiscating it from its citizens – real and corporate – in the form of higher taxes.
The downside of this is more than simply devaluing the currency. It also denies the capital to business people and companies that otherwise would expand existing operations or develop new ones. It also creates uncertainty in the job-creating private sector by raising the specter of higher taxes to cover the deficit. If businesses believe taxes will increase in the future, expansion will not occur and jobs won’t be created. In addition, further worsening America’s status as a debtor nation by borrowing ever greater sums from China, Japan, the Saudis and others, adds to the uncertainty about the strength of the dollar in the future.
The bottom line here is that much needed jobs may not be created for millions of Americans who are out of work. A recent survey of economists predicted that the jobless rate would still be at 9.6% in the summer of next year, and may only reach 7% by year-end 2013.
No less a true Democrat than John F. Kennedy took a risk and lowered tax rates. The resulting expansion of businesses actually increased tax revenues. Ronald Reagan took this same path with the same results. In fact, George W. Bush pushed through lower tax rates to counter the recession in the early years of his first term. Again, business boomed, unemployment shrank to near-historically low levels, and tax revenues actually increased. Tax cuts raise government revenues. History has proven it.
If Democrats fear that revenues won’t be sufficient to finance the trillions of dollars in deficit spending they have created, the simple answer is to trash the giveaway programs and spend only what sound, business stimulating revenues will produce. The United States is not a European socialist nation. In fact, the European socialist nations are beginning to realize the error of their ways and retrench toward a more free enterprise oriented system.
While Obama appears to have caved on extending the Bush-era tax reductions for all taxpayers, including most importantly the higher income ones who make the decisions that lead to job growth, it is only temporary. Successful business people know that we’re facing a long, slow recovery from the Great Recession. They know that that business planning necessarily is a long-term proposition. A two-year reprieve only delays the agony of joblessness and minimal growth.
There are those who would say that the foregoing observations are "Republican talking points". That may be true, but more importantly, they are fiscally sound points for economic recovery and stability. Americans are independent and entrepreneurial by nature. They prefer capitalism and ask only for an opportunity to compete in the marketplace on equal footing. Time and again they have proven to be fully capable of making good decisions for themselves and their families and communities. It's the worst possible ego trip to assume that one is part of an elite class that is intellectually superior to the greater population. And worse, to attempt to force their pseudointellectualist ideals down the throats of an unwilling population.
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©2010 by The Falbey Institute for the Development of Real Estate
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