Headlines

Note the Trump picture selected ...

These headlines are real ... they have all been discovered on Internet news sites.

University of Washington declares proper English usage is racist

Google sues Uber over driverless tech ...

Police: nerve agent [VX] found on Kim Jong Un's dead brother

White House selectively blocks news outlets from Spicer briefings

Trump falsely claims that Obamacare covers 'very few people'

State senator wants to strip Clinton name from Little Rock airport

Trump Tower opens in Vancouver, mayor wants to take off name

Witches unite to cast 'binding spell' on Trump and followers

Bolton: Use of nerve gas proves North Korea is crazy, irrational, and dangerous

Netherlands holds inquiry on whether it could ditch Euro ...

Trans wrestler wins in first round of girls tournament ...

Starbucks brand crashes after announcement of plan to hire 10,000 Muslim 'refugees'

Good as Gold

Just about a year ago, when the price of gold hit an all-time high ($1,900/ounce), I wrote a blog entry discussing this price and the United States' gold reserves relative to the U.S.'s money supply (see: Gold Bug). Now that the Republicans are considering reinstating the gold standard if Romney is elected (see: CNBC Story), I believe my previous analysis deserves to be updated.

Primarily due to the strength in the dollar relative to other currencies, the price of gold has dropped to $1,670 per ounce and Bernanke’s printing press has expanded the U.S. money supply over the last year by 8%+ to slightly above one trillion dollars. Assuming that the U.S. stock of gold still stands at 8,965.6 tons (I can’t seem to find an updated number), this would value our gold reserves at $479.1 billion … less than one half of what would be needed to fully back our current money supply at parity … if we were to go back to a gold standard.

What are the implications of the U.S. re-adopting the gold standard? I can think of three possible impacts:

1) In order to back our money supply at parity, the price of gold could double to almost $3,500 per ounce … and continue to grow at the rate of the United States’ currency expansion. (I think this is result is quite unlikely.)

2) The U.S. might chose to back its currency with a fractional conversion rate … say one ounce of gold could be purchased from the Treasury for $8,000. This option might also be restricted to U.S. citizens or institutions. Even though this would effectively be a gold backing of our currency, very few rational investors would exercise this option. But countries, like China, with huge dollar reserves might be so tempted … only they would have convert their dollar reserves to actual currency and to go through U.S. proxies … and thus would be selling their dollars at a very steep discount.

3) The U.S. dollar would then have the most solid backing of any currency in the world. I could easily see the Euro exchange rate fall to 2 Euros to the U.S. dollar. And China would also be hard pressed to keep its own currency from inflating greatly (a good thing). This should dramatically drive down the price of gold (and oil) … resulting in a continued positive feedback loop. A strong dollar, of course, could impact U.S. exports adversely but this could be offset, balance of payments wise, by our much lower payments for foreign oil … and a stronger Chinese yuan.

Going to a gold-backed dollar would clearly engender very complex financial cross-currents and I’m certain that I have just scratched the surface of possible outcomes. However, it is clear to me that the hay days of United States’ economic hegemony have corresponded to periods of a strong dollar. This might be an easy template to apply to a move back to the gold standard.

Nostradamus and Me

That famous seer, Nostradamus, has a set of dire predictions for 2012 ... see his Grim News.  Although I do not partake of hallucinogenics nor gaze into a bowl of shimmering mercury (or was it water?), I, along with my friends and family, also make annual predictions as part of our New Year's Eve festivities.  Mine are not quite so dour.  For what its worth, here they are::

• China’s economy will weaken significantly … resulting in much civil unrest
• At least one country will leave the EuroZone
• A third party candidate will run for President … almost assuring Obama’s re-election
• Massive student-loan meltdown. U.S. taxpayers foot the bill.
• China will annex more territory … possibly part of Mongolia
• Jimmy Carter will attend Hugo Chavez’s funeral
• Another Solyndra-like green-energy scandal in the Obama Energy Dept.
• The Iran “navy” will be destroyed trying to stop shipping through the Strait of Hormuz
• Hillary Clinton will replace Joe Biden on the Obama ticket
• Israel will attack Iran … destroying many nuclear facilities
• It’s Green Bay vs. Patriots in Super Bowl. Green Bay wins.
• Inflation finally bites … up 5%
• The Occupiers will re-emerge with the warm weather … resulting in meaningless bloodshed
• At least one state will go bankrupt. U.S. taxpayers foot the bill.

The Big Mac Index

Being that my wife and I are traveling to France this fall, I am watching the euro, hoping against hope that it will deflate relative to the dollar before we have to pay the bills then.  One of the more interesting ways of comparing monetary exchange rates is by using the Big Mac index created by The Economist magazine.  I won't go into the details of this calculation here but those of you who are curious please visit The Economist for its very interesting algorithm.  The bottom line is that the euro seems to be overvalued by about 35% ... which means that the euro should currently trade at about $1.10 per euro ... not the current $1.45 per euro.  Wouldn't it be nice if this adjustment were to occur before our trip?

Another salient part of this investigation involves what might happen to the economy in the European Economic Community before and during our trip.  Any shocks here might well affect the exchange rates to which we would be subjected  To pursue this analysis I have found an interesting website that shows the cost of credit default swaps (CDSs) in many countries (see: Credit Default Swap Costs).  Think of this credit default swap data as the cost to buy insurance against a particular country defaulting on $10 million of its 5-year sovereign debt.  Obviously, the higher the cost ... the greater the risk of default ... and the greater the chance of this country's currency deflation. 

Today, it costs $47.35 for such insurance against the U.S.'s sovereign debt versus $164.84 against France's (and $2,218.27 to insure Greece's).  Now the euro is used in many of the countries represented in this table so to be very accurate, one would have to use a GDP-weighted average of these CDS figures.  So, forgetting about how our Federal Reserve Bank and the European Central Bank intervene to manipulate these exchange rates, surely the cost of the euro would/should move close to the Big-Mac-index parity figure by the time of our trip.  If it doesn't, I think then my wife and I will be buying lots of Big Macs in France this fall.

Predictions for 2011

Every New Year's Eve a group of friends get together to feast, imbibe, tell stories, Yankee swap, and make predictions for the coming year.  Here are some of the more interesting predictions for 2011:

• Facebook takes second place to a glossier social networking site

• The Euro will decline by at least 20%

• Serious civil unrest in Venezuela

• North Korea will suffer an economic collapse

• Oprah decides to run for public office

• Kate Middleton will be 2 months pregnant at her royal wedding

• Gracie Mansion (NYC) will be held by terrorists for 12 hours: 5 killed, 7 wounded

• True Grit will win Best Movie Oscar

• Prominent Wall St. firm will collapse amidst political scandal

• Suze Orman will file for bankruptcy

• Patriots win League championship and then Superbowl by 14+

• Obama proves he was born in the U.S.A.

• Glenn Beck retires after scandals hound him

• Bottled water co. has massive recall -- contaminated by plastic bottles

• Supreme Court Justice is caught in illegal activities, steps down

• Two major religions talk merger

• A plot to disrupt the power gird is foiled, but only after 1/4 of the country goes dark

• Tiger Woods declares he is gay

• Randy Moss begs to come back to Patriots and is welcomed home

• Unemployment will fall below 8%

• Gold prices will stall but silver prices will go up by 20%+

• More global warming data found to be fudged

• Massive student-loan meltdown -- Uncle Sam foots the bill

• One state will declare bankruptcy

• Colin Firth wins Best Actor Oscar for The King’s Speech