Professor Elam

Dennis
Elam

February
13, 2009

One
on One

Word
Count 729

 

Real Money

The
big picture  is that everything is
being re priced in terms of the only money that politicians cannot print from
trees. Yes, gold is rising in price and everything else is falling against
gold.

Richard
Nixon took the United States off the gold and silver standard. This allowed the
Federal Government to print or borrow all the money it desired, at least until
now. When the US Dollar does not have to be backed by a hard asset that is limited
in quantity, Congress can produce an unlimited amount of fiat currency, the US
Dollar.  The result was that
Federal Expenditures exploded. The Federal Budget went from hundreds of
billions to over two trillion. Now just  one spending package being considered exceeds one trillion
dollars.

In
the summer of 2007,  just a brief
few months ago. it took 21 ounces of gold to ‘buy’ the Dow Industrial.  Gold was $700, the Dow was over 14,000,
the math is simple. Now it only takes about 8 ounces of gold to buy the DOW,
yes $900 gold versus an 8,000 DOW Industrial. One might argue that the entire
run in stocks from 1982 to 2000 was not so much a bull rally in stocks but a re
pricing of stocks in ever cheaper dollars!

Here
is another perspective. In the summer of 2007, it took less than eight barrels
of oil to buy one ounce of gold Now it takes 22 barrels of oil to buy one ounce
of gold.   Oil, and everything
else, is being re-priced in terms of gold.

Why,
you ask?  Because clearly oil
producers can bring forth more oil on demand, and have done so.  This is not the case for gold. That is
why gold remains the  gold standard by which we can measure
real value.

In
Washington, the drop in oil prices is the only good news on the horizon.  Lower oil prices at least make driving
cheaper. Ford is said to be making more F 150s to supply demand. Demand for
hybrid cars has collapsed.  
Nancy Pelosi no longer has the evil oil speculators to kick around.  Oil fuels the coffers of Washington’s
‘enemies.’  Iran, Venezuela, and Russia
economies are arguably on the ropes given their dependence on this one
commodity.   However, as
always, this throws a wrench in the plans of the alternative energy crowd. You
will notice Pickens has pulled the television ads for his Windmills. Yes the
oil is still imported but why not import and use it at these prices?  Certainly one cannot justify more
expensive alternatives such as wind, solar, etc. The same thing happened in
1986 as oil prices collapsed making alternatives simply uncompetitive.   And in this recession, it is
unlikely and politically impossible for Congress to raise gasoline prices to
force ‘green’ alternatives. 

 

Meanwhile
the same spending that got us to this point has failed to ‘stimulate’ the
economy. Millions voting via the  stock exchange have turned thumbs down on Geithner’s plan, or
lack therof,  this past week.
Indeed, stock averages now threaten the previous November lows.  On Thursday the Industrials were a
scant 300 points form taking us to new lows.   What the market would like to see is the following.

Reckless
spending has gotten us to this point needs to end.

The
markets must do for houses what they have done for oil. Assets must be
re-priced at real market levels. Washington loves cheap oil, but not cheap
houses given the loans against those houses.  Yet only re-pricing hosing to market will bring real estate  markets back.

An  immediate stimulus would be to
immediately reduce withholding and or social security taxes to increase take
home pay, next week. With more money in their paychecks, consumers might spend
some of it. Yet Congress fears letting people realize just how much the Feds
take each payday. Reducing the take would bring that realization home to
millions of voters.

And
so, Congress applies the same solution that has caused the problem, deficit
spending. Gold has risen to $940.  
While we may see a gold correction from its recent vertical rise, expect
it to continue to rise until the world’s governments get spending under
control, not out of control.

 

Dennis Elam teaches at Texas
A & M San Antonio and can be reached at dennis.elam@att.net.