Social Insecurity

Mar 5, 2004


MARKET NEWS DIGEST
-> Greenspan Urges Social Security Cuts -AP
-> Stocks lower on weak data -CBSMW
-> Metals off lows; sparks value buys -CBSMW
-> Greenspan urges action on deficits -CBSMW
-> U.S. consumer confidence plunges in Feb.
-> Job Worries Dim Outlook of Consumers -AP
-> Adelphia: Next in Parade of Fraud Trials -NYT
-> Leibovit Files - VRTrader.com

COMMENTARY
-> Measuring Household Financial Health -Greenspan
-> Hard money -The Economist
-> RESTORE THE STANDARD - IS THE PRICE RIGHT? -Craig R. Smith
-> The Debate Over Exporting Jobs -STEVE LOHR, NYT
-> GOLD: DOING THE RIGHT THING! -Bill Bonner, DR
-> The Stubborn Trade Deficit - John Mauldin, FrontlineThoughts.com
-> Ash Wednesday Launches THE PASSION

MARKET NEWS DIGEST


Economic Reports 3/1-3/5, 2004:
---------------------------------------------
MONDAY, March 1:
Personal Income & Spending for January (8:30 am ET)
ISM Index for February (10 am ET)
Construction Spending for January (10 am ET)
Treasury auctions 3&6-month bills
Auto Sales for February
---------------------------------------------
TUESDAY, March 2:
Weekly Chain Store Sales (9 am ET)
Challenger Layoffs Report for February (10 am ET)
Fed Chairman Greenspan addresses Economics Club of NY (12:30 am ET)
---------------------------------------------
WEDNESDAY, March 3:
ISM Services Index for February (10 am ET)
Fed releases Beige Book (2 pm ET)
---------------------------------------------
THURSDAY, March 4:
Productivity Index for Q4 (8:30 am ET)
Weekly Initial Jobless Claims (8:30 am ET)
Chain Store Sales for February (11 am ET)
Weekly Money Supply (4:30 pm ET)
---------------------------------------------
FRIDAY, March 5:
Employment Report for February (8:30 am ET)
Consumer Credit for January (3 pm ET)
---------------------------------------------
---------------------------------------------

Leibovit Files - Tues. March 2, 2004

Opening Comments

401K came to the rescue for the stock market yesterday and March began strong. Economic reports were mixed at best. Breadth was quite positive but volume slowed to the upside. We are coming into today's session up four days in a row in several indices but there still appears to be some room left to the upside. The rope is beginning to stretch thin.

Forget economic reports. There were several big stories yesterday. Platinum posted a 24 year high yesterday over $900 an ounce, Copper surged to new highs of $1.399, the Dollar rallied ALONG with the metals, interest rates continued lower to nearly 5 month lows early in the session, and homebuilding shares rallied sharply despite repeated bearish commentary to name only a few noteworthy events.

Nasdaq has the most to gain should this current rally continue, but overall we still feel we're setting up for a substantive correction whether its this month or whether it occurs into May. When the shake comes it will probably be scary and we cannot predict the exact moment it will begin. Hopefully, before it does begin our work will generate clear sell signals (ideally, Negative Volume Reversals (tm)) and we'll jump on board for the ride. New investors should sit on the sidelines, unless they are willing to buy into weakness. Still, we're late in the game for this market cycle - so caution is advised.

VRTrader


Greenspan urges action on deficits -CBSMW
By Rex Nutting, CBS.MarketWatch.com
Feb. 25, 2004

WASHINGTON (CBS.MW) -- Federal Reserve Chairman Alan Greenspan urged Congress on Wednesday to take the long view and act now to reduce the mounting federal debt.

Greenspan said running federal deficits is wise and necessary for the next year or two to support the fledgling economic recovery. But deficits in the long run could retard U.S. economic growth, he warned.

If Congress allows deficits to grow, the interest payments on the debt would create even larger deficits.

"The resulting rise in the federal debt could drain funds away from private capital formation and thus over time slow the growth of living standards," he said.

The aging Baby Boom generation will begin retiring in just four years, the beginning of a long process that could boost government spending for retirement and health security programs, "demands we almost surely will be unable to meet unless action is taken," he said.

"I believe a thorough review of our spending commitments -- and at least some adjustments in those commitments -- is necessary for prudent policy," Greenspan told the House Budget Committee in prepared testimony.

"I certainly agree that the same scrutiny needs to be applied to taxes," he said, adding that most of the adjustment should come "from the outlay side."

Greenspan suggested that cuts be made in Social Security to limit cost-of-living increases and perhaps to adjust the retirement age.

"We will certainly have no choice but to make significant structural changes in the major retirement programs," he said.

Forecasting growth in Medicare is more difficult, he said. But he said new technologies will undoubtedly increase spending on health care.

http://www.cbs.marketwatch.com

[ED NOTE: It's not just Greenspan at the FED that's worried about deficits ... Bloomberg reports ... "Federal Reserve Governor Edward M. Gramlich, a former director of the Congressional Budget Office, knows how elected officials hate to inflict pain on their constituents. Providing largess is much more to their liking. However, in a speech in London today, Gramlich made a persuasive case that the United States, and those constituents, would be far better off in the long run if President George W. Bush and members of Congress turned those priorities around. Gramlich warned that federal budget deficits pose a serious danger to the U.S. economy and that they won't go away by themselves. The falling dollar is one of the mechanisms that can help reduce the trade deficit by making U.S. exports cheaper for foreign buyers while making imports more expensive here. The process, of course, makes the U.S. somewhat poorer, something that has to happen sooner or later." Declining Dollar...]FULL STORY


U.S. consumer confidence plunges in Feb. -CBSMW
By Rex Nutting

WASHINGTON (CBS.MW) -- U.S. consumers became much more cautious in February, the Conference Board said Tuesday. The consumer confidence index plunged to 87.3 in February from a revised 96.4 in January.

Economists expected the index to fall to about 92.9. The present situation index eased to 73.1 from 79.4, while the expectations index sank to 96.8 from 107.8.

"Consumers remain disheartened with current economic conditions, and at the core of their disenchantment is the labor market," said Lynn Franco, head of the board's consumer research unit.

Compared with January, more consumers thought conditions were "bad" and thought jobs were hard to get. Fewer consumers think their incomes will grow in the next six months.

http://www.cbs.marketwatch.com

[Ed. Note: Quote of the day ... "All the paper money issued today is Federal Reserve Notes. The real backing for the nation’s money is faith in the strength, soundness and stability of the U.S.economy."
-Hats the Fed. Reserve Wears, Federal Reserve Bank of Phil., p. 4 ... more from Rediscoveringgold.com.


U.S. STOCKS LOWER ON WEAK DATA
Factory orders slow, jobless claims edge up
By Mark Cotton, CBS.MarketWatch.com

Feb. 26, 2004

NEW YORK (CBS.MW) - U.S. stocks were lower Thursday as concerns about the robustness of the U.S. economic recovery resurfaced after a surprise dip in January factory orders and an uptick in weekly jobless claims.

Losses accelerated after the Commerce Department reported a 2 percent drop in new homes sales in January to a seasonally adjusted annual rate of 1.11 million, the slowest pace since May. Forecasts were for sales of 1.06 million, according to analysts polled by CBS MarketWatch

New orders for durable goods fell 1.8 percent in January, far short of the 1.5 percent gain expected by Wall Street economists. Excluding the 10.4 percent drop in transportation orders, durable orders were up 2 percent.

The number of people applying for unemployment benefits for the first time rose 6,000 to 350,000 in the week ended Feb. 21, the Labor Department said Thursday. The four-week average rose 2,750 to 354,750, the fourth consecutive increase in the more reliable measure of jobless claims and the highest level since December of last year. See full story.

The Dow Jones Industrial Average was down 56 points, or 0.5 percent, at 10,5465, after falling to an intraday low of 10,539 following the release of the new homes sales data.

The Nasdaq Composite was down 7 points, or 0.4 percent, at 2,015.

The S&P 500 was off 3.71 points, or 0.3 percent at 1,140.

http://www.cbs.marketwatch.com


Metals off lows; sparks value buys -CBSMW
By Myra P. Saefong, CBS.MarketWatch.com
Feb. 26, 2004

SAN FRANCISCO (CBS.MW) -- Metals futures closed well off the session's low Thursday, as the weaker prices sparked value buying among investors who expect metals to strengthen in the longer term.

"Gold near the $390 attracted value players," said John Person, head financial analyst at Infinity Brokerage Services.

Prices are down nearly $40 an ounce from highs of $431.50 in January, he said.

Prices are down nearly $40 from the highs of $431.50 in January and gold may still see $450, and possibly even $500 by the end of this year, he said.

Combined with prices so close to the $390 level Thursday, traders had a "good reason to enter the long side," Person said.

Gold for April delivery fell 60 cents to close at $395.50 an ounce, but that's well off the intraday low of $391, which was the lowest intraday level the futures market has seen since late November.

Strength in the dollar kept a limited gold's recovery Thursday. The greenback rallied to one-month euro highs and three-month yen peaks Thursday on speculation the European Central Bank could cut interest rates next week.

http://www.cbs.marketwatch.com


Job Worries Dim Outlook of Consumers -AP
Feb. 25, 2004

Consumer confidence tumbled in February as persistent worries about jobs tarnished Americans' optimism, an industry group reported yesterday.

The Conference Board said its consumer confidence index dropped more than 9 points, to 87.3, after a rise in January to a revised reading of 96.4. That reading was the index's highest since mid-2002. Analysts expected a decline, but the index came in significantly below their consensus forecast of 92.3.

"Consumers began the year on a high note, but their optimism has quickly given way to caution," said Lynn Franco, director of the Conference Board's Consumer Research Center. "Consumers remain disheartened with current economic conditions, and at the core of their disenchantment is the labor market."

The confidence reading is watched closely because consumer spending accounts for two-thirds of the economy. The decline in confidence is a sign that consumers are disturbed by changes in the job market, which have quickly become a crucial issue in the presidential campaign, economists said.

http://www.nytimes.com


Adelphia: Next in Parade of Fraud Trials -NYT
By ANDREW ROSS SORKIN
Feb. 23, 2004

Corporate-scandal trial season is in full swing as John J. Rigas and his sons are scheduled to go on trial in federal court in Manhattan.

He had to hand over his tie, belt and shoelaces when he was arrested.

John J. Rigas, the 79-year-old founder of Adelphia Communications, has said that the humiliation of his arrest has haunted him since he was taken from his apartment on the Upper East Side of Manhattan at 6 a.m. on July 24, 2002, with two of his sons, and charged with looting Adelphia of more than $1 billion. The government described it as "one of the most extensive financial frauds ever to take place at a public company."

Today, Mr. Rigas - along with those two sons, Timothy and Michael - will go on trial in Federal District Court in downtown Manhattan to fight those charges. He may even take the stand. His lawyers have indicated that they may call him as a witness, hoping his frailty and soft-spoken manner could win over a jury that may otherwise have lumped him with the likes of L. Dennis Kozlowski and Martha Stewart, both of whom are already on trial in Lower Manhattan. Ms. Stewart's trial is in the same complex of federal courthouses on Pearl Street where the Rigas trial will be held, and Mr. Kozlowski's is in state court a few blocks away.

Corporate-scandal trial season is in full swing. Before the Rigas case concludes - jury selection starts today and the trial is expected to last several months, with dozens of witnesses - the same federal courthouses will also be the site for the trial of WorldCom's former chief financial officer, Scott D. Sullivan, and the retrial of Frank P. Quattrone, the former Credit Suisse First Boston technology banker, whose first trial ended in a hung jury.

"The chickens are all coming home to roost now," said John J. Fahy, a former federal and New Jersey prosecutor. "We're seeing the results of things that began when Enron first broke."

"The Department of Justice can now honestly say that they have done a lot," he said, adding that the trials will ease some of the public pressure on the department to act against corporate fraud.

FULL STORY


Greenspan Urges Social Security Cuts -AP
MARTIN CRUTSINGER, Associated Press
Wed, Feb. 25, 2004

WASHINGTON - Federal Reserve Chairman Alan Greenspan, stepping into the politically charged debate over Social Security, said Wednesday the country can't afford the benefits currently promised to the baby boom generation.

He urged Congress to trim those benefits to get control of soaring budget deficits, which he said threatened a "very debilitating" rise in interest rates in coming years.

Democratic presidential candidates denounced his proposals, and President Bush and other Republicans sought to distance themselves from the Republican Greenspan.

The central bank chairman also repeated his view that Bush's tax cuts should be made permanent to bolster economic growth. He said the estimated $1 trillion cost should be paid for, preferably, with spending cuts so the deficit would not be worsened.

FULL STORY

[NOTE: According to Craig R. Smith, "It's time to get the government's hands out of our pockets and instead to allow free market privatization of our retirement options. Mr. Smith agrees with CATO Institute's Social Security Choice plan calling for half of the payroll tax (6.3%) to fund exisiting retirees and the other half to allow individuals to divert into privately invested accounts. It's time to become financially responsible America!"

FACTS:
• More than 47 million people will collect Social Security benefits this year. By 2030, there will be 70 million Americans of retirement age.

• The full retirement age is 65 years and 4 months. It rises two months each year, increasing to 67 for people born after 1959.

• The program is projected to pay more in benefits than it will collect in taxes in 2018.

• The average monthly retirement benefit was $879.70 as of January.

WHITE HOUSE RESPONSE: Press Briefing by Scott McClellan
2-26-04, 1:13 P.M. EST

MR. McCLELLAN:... The President has also made it very clear that, as part of our efforts to strengthen and reform Social Security, we should allow younger workers the opportunity to invest a small portion of their retirement savings in personal retirement accounts. And the President talked about how voluntary personal retirement accounts will allow those who choose the potential to realize an even greater rate of return on their savings. That's part of our efforts to save and strengthen Social Security.

Q When he talks about those near retirement, does he use the age 50 to 55 benchmark that the Social Security Administration --

MR. McCLELLAN: We said that the principles -- have laid out those retirees and near retirees. That's what we've laid out in the principles.

Q But here we appear to have a situation where the record deficits that the federal government is running now appear not only to be having an effect on the debt, but, according to Chairman Greenspan, may have an effect on Social Security. It seems to me as though that's a pretty big bombshell to be dropped on your head in the middle --

MR. McCLELLAN: Well, you're talking some short-term issues and you're talking some long-term issues that need to be looked at. The President has called for saving and strengthening Social Security. He appointed a commission. The commission went in and looked at a variety of ideas and the commission came back and said there needs to be a national dialogue on this issue. Members of Congress are starting to put forward ideas. So there is some movement to address this important issue. We do need to strengthen and reform Social Security, and the President has talked about his principles for doing that.

Q But doesn't the suggestion that the deficits that you've been running -- which your economic team has passed off as "easily manageable in this economy" -- suddenly are having the potential for an effect that goes far beyond anything that has been calculated --

MR. McCLELLAN: You're talking long-term. This President has acted to address some long-term fiscal issues, such as Medicare and Social Security. We took an initial step in the Medicare reform legislation to put in some cost controls to the program. Now, there's more that needs to be done. There's also steps we need to take when it comes to Social Security. So you're talking about some long-term issues here, and some long-term problems that we face. And then, of course, there's the deficit. The President talked about how we're working to cut that in half over the next five years.

FULL BRIEFING


REQUEST "SPECIAL REPORT: SOCIAL INSECURITY -- An Overview of the Social Security Crisis And Possible Solutions"
LATEST RELATED STORIES:
Fed chair is right about Social Security, Medicare troubles -COX 2-27-04
Private accounts alone can't bail out Social Security -USAT
AARP Calls Proposed Social Security Cuts Irresponsible--2-26-04
Fed chief: Social Security cuts needed 'as soon as possible' - Seattle Times
Can you count on Social Security? -CNN

COMMENTARY


Measuring the Household Financial Health - Alan Greenspan
At the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C.
Feb. 23, 2004

One concern of many lending institutions has been the increase in bankruptcy rates during the past several years to an unusually high level. Elevated bankruptcy rates are troubling because they highlight the difficulties some households experience during economic slowdowns. But bankruptcy rates are not a reliable measure of the overall health of the household sector because they do not tend to forecast general economic conditions, and they can be significantly influenced over time by changes in laws and lender practices.

In contrast to bankruptcy rates, delinquency rates may be a bit better measure of the overall health of the household sector. The recent experience with some delinquency rates has been encouraging, with rates falling for several measures of credit card and automobile debt. But, like bankruptcy rates, delinquency rates can reflect changes in underwriting and collection practices, and they may measure the financial health of a relatively narrow set of households.

A primary measure used by the Federal Reserve to assess the extent of American household indebtedness and to provide a view of the financial health of the overall consumer sector is the quarterly debt service ratio. The debt service ratio measures the share of income committed by households for paying interest and principal on their debt. When the debt service ratio is high, households have less money available to purchase goods or services. In addition, households with a high debt service ratio are more likely to default on their obligations when they suffer adversity, such as job loss or illness.

Of course, debt payments are not the only financial obligations of households and thus the Federal Reserve also calculates a more general financial obligations ratio. This measure incorporates households' other recurring expenses, such as rents, auto leases, homeowners' insurance and property taxes, that might be subtracting from the uncommitted income available to households. The Federal Reserve splits the aggregate financial obligations ratio into separate measures for homeowners and renters, measures that I will discuss in detail below.

Changes in the Debt Service and Financial Obligation Ratios over Time Both the debt service ratio and the financial obligations ratio rose modestly over the 1990s. During the past two years, however, both ratios have been essentially flat. The debt service ratio has remained a touch above 13 percent, whereas the financial obligations ratio has hovered a bit above 18 percent.

These ratios move slowly because both the stock of debt and the interest rates associated with the stock change slowly. Another reason is the stability in the ratio for homeowners, who hold the bulk of all household debt. Despite annual mortgage debt growth that exceeded 12 percent a year over the past two years, the financial obligations of homeowners have stayed about constant because mortgage rates have remained at historically low levels. The homeowners' financial obligations ratio has also remained relatively constant despite this very rapid growth in mortgage debt, partly as a result of an enormous wave of refinancing of existing mortgages, which ended only in the fall of 2003. Refinancing has allowed homeowners both to take advantage of lower rates to reduce their monthly payments and, in many cases, to extract some of the built-up equity in their homes. These two effects seem to have roughly offset each other, suggesting that homeowners might set a target for their mortgage payments as a proportion of income and adjust their borrowing accordingly.

Indeed, the surge in mortgage refinancings likely improved rather than worsened the financial condition of the average homeowner. Some of the equity extracted through mortgage refinancing was used to pay down more expensive, non-tax-deductible consumer debt or used to make purchases that would otherwise have been financed by more expensive and less tax-favored credit. Indeed, the refinancing phenomenon has very likely been a supportive factor for the general economy. The precise effect is difficult to identify because it is hard to know how much of the spending financed by home equity extraction might have taken place anyway. Nonetheless, we know that increases in home values and the borrowing against home equity likely helped cushion the effects of a declining stock market during 2001 and 2002.

Rising Credit Card Debts for Homeowners and Renters

The rise in homeowners' debt service burdens over the 1990s, albeit small, is associated with increases in their nonmortgage debt and, in particular, with rising levels of credit card debt. The financial obligation associated with credit card debt is difficult to measure. On the one hand, households are obligated to pay only a minimum amount and thus, in times of financial stress, a household can forgo making more than this minimum payment. On the other hand, we know that many households make more than the minimum payment and indeed likely would be quite uncomfortable paying only the minimum amount. During financial difficulties, these households might even consume less to pay more than the minimum. Defining the point at which households feel they should pay down their credit card debt is difficult, and thus our measure of debt service relies on estimates of minimum payments required by credit card lenders.

There are several reasons that homeowners might carry more credit card debt than they did a decade ago, but these reasons generally do not indicate financial weakness among homeowning households. Indeed, as noted, delinquency rates on credit card payments have been falling during the past year, despite households' relatively larger holding of credit card debt.

One possible reason for the secular increase in credit card debt is rising U.S. homeownership rates. According to the Bureau of the Census, the share of U.S. households that own homes rose from about 64 percent in 1990 to almost 68 percent in 2003 even as the population grew substantially. Because of rising incomes, lower interest rates, and increased rates of household formation, more people have chosen to buy homes rather than to rent, increasing the value of mortgages outstanding. Although it does not show the relationship conclusively, the Federal Reserve's Survey of Consumer Finances suggests that these newer homeowners who make smaller down payments tend to bring with them higher levels of nonmortgage debt and, in particular, credit card debt. The ability of lending institutions to manage the risks associated with mortgages that have high loan-to-value ratios seems to have improved markedly over the past decade, and thus the movement of renters into homeownership is generally to be applauded, even if it causes our measures of debt service of homeowners to rise somewhat.

Another possible reason for rising credit card debt ratios is the use of credit cards for a variety of new purposes. The rise in credit card debt in the latter half of the 1990s is mirrored by a fall in unsecured personal loans. Reflecting this general trend, the proportion of personal loans in credit union portfolios has been declining as well. The wider availability of credit cards and their ease of use have encouraged this substitution. The convenience of credit cards also has caused homeowners to shift the payment for a variety of expenditures to credit cards. In sum, credit card debt service ratios have risen to some extent because households prefer credit cards as a method of payment.

* * *

Conclusion

In evaluating household debt burdens, one must remember that debt-to-income ratios have been rising for at least a half century. With household assets rising as well, the ratio of net worth to income is currently somewhat higher than its long-run average. So long as financial intermediation continues to expand, both household debt and assets are likely to rise faster than income. Without an examination of what is happening to both assets and liabilities, it is difficult to ascertain the true burden of debt service. Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress. And, in fact, during the past two years, debt service ratios have been stable.

FULL STORY


Hard money -The Economist
Money used to be backed by gold. Now it is backed by the promises of central bankers. Are these worth less than they were?
Oct 14th 2003

IN BETWEEN saving the world from terrorism, President George Bush is finding time to dash off to Asia at the end of this week, first to Tokyo and then to Bangkok, where he will attend a meeting of the clumsily named Asia-Pacific Economic Co-operation, which sounds a little better as its acronym. There he will meet, among others, Hu Jintao, the president of the country American manufacturers most love to hate when they are not investing there. It is a racing certainty that the subject of China’s currency, the yuan, and whether it should be revalued from its present 8.3 per dollar, will be high on the agenda, if not atop it. It is, of course, always lovely to talk, but although America wants a lower dollar, and wants one now (which is understandable for a country with a current-account deficit of 5% of GDP and a congenital inability to save), China couldn’t seem to care less.

Quite probably, then, tension will increase and the dollar will fall against other currencies that do not have such a firm peg. The rapidity of this fall will depend on two things. The first is the force with which Washington rattles its sabre. On this subject, Buttonwood merely notes that next year is election year. The second is whether other countries, especially those in Asia which together hold $1.7 trillion of IOUs issued by the American government, are prepared to see the Treasuries in their portfolios rapidly devalued, their export competitiveness choked and deflationary pressures intensified.

Japan has such worries in spades. Though the world’s second-biggest economy nowadays receives less attention than it did, Japan’s recovery started in the fourth quarter of 2001 and growth is picking up. But officials there are increasingly worried that a rising yen will choke it off. The yen is close to a three-year high against the greenback. Its rise accelerated after the recent G7 summit in Dubai, when America’s weak-dollar policy became most obvious. Yet Japan needs the yen to fall because it needs inflation to help wipe out the massive debts the country incurred both during the bubble and in trying to get the economy going again after it had popped. Last week, the Bank of Japan further eased monetary policy, not in the usual way, by lowering the rate of interest, but by printing more money. The money supply, narrowly measured, is already rising at an annual rate of 21%.

At some point, perhaps even the European Central Bank will wake up to the fact that the rising euro will keep the European economy close to recession. All of which is to suggest that none of the world’s major currencies is especially alluring; for one reason or another governments in all three might want them to fall. Of course, they cannot all fall against each other. They can, however, fall against something largely unloved by those under the age of 50, and famously dismissed by Keynes as a “barbarous relic”: gold.

All currencies are backed by something. When the world was on the gold standard, that something was the yellow metal: the value of each pound sterling, dollar or French franc was determined by the (fixed) amount of gold that the central bank agreed to deliver against it. Now those currencies are backed by something altogether less tangible: central bankers’ promises that the currencies will maintain their value. Quite probably, these promises are not worth as much as they were.

It is only in very recent years that gold has lost its allure as a store of value. For centuries, the metal was virtually synonymous with money: the Egyptians were casting gold bars as money as long ago as 4000 BC. The gold standard’s heyday was from the 1870s to the 1930s (with a brief interruption in the first world war). Britain left the standard in 1931, a move pronounced as “the end of an epoch” by no less an authority than The Economist. America did the same in 1933. One by one, other rich countries followed suit. The gold standard was revived in a famous agreement in Bretton Woods, New Hampshire after the second world war, but only in America, which by then had three-quarters of the world’s gold stock. Although other currencies were fixed to the dollar, they were not fixed directly to gold. As other countries prospered, so America’s current-account deficit began to rise and its stock of gold began to dwindle. By 1971, inflationary pressures were driving up the real value of the dollar. In August of that year, President Richard Nixon took America off the gold standard once again.

Since then there has been a central-banking standard instead. The standard was set by Paul Volcker, the Federal Reserve chief who quashed inflation (which erodes the value of money) with draconian interest rates in 1980, and killed off the bull market in gold, which had climbed from $35 an ounce in 1968 to $850 an ounce in 1980. In its place came a bull market in government IOUs. Bonds, after all, pay interest, unlike gold.

But hard money can be an unpleasant medicine, and the problems facing central bankers have not gone away since Mr Volker’s day. Inflation has shown up in more than the price of carrots: it has also pushed up the prices of shares and property. For understandable reasons, central bankers have been slow to spot and prick asset bubbles. Thus have they swelled and popped in America and Japan in recent years, leaving mountains of debt in their wake, and weakening the credibility of central bankers as they try to control economies by tweaking the short-term rate of interest.

It used to be that gold perked up only when inflation did. But perhaps central bankers’ lack of credibility explains why the price of gold has been rising even as deflationary pressures have mounted. It now fetches some $370 an ounce, down from its peak of nearly $390 last month, but way up from its price in the late 1990s, when it dipped to $253. Chris Wood, a strategist at CLSA, a stockbroker (and, in the interests of full disclosure, a former colleague at The Economist), reckons that the price could easily reach $3,400 or so—the level at the previous peak, adjusted for the rise in American personal income since then. “Gold will rise as confidence in the ludicrous powers still attributed to central bankers wanes,” he says. Possibly, the debt mountains that economies have built up will have to be inflated away. But no one knows how savage deflation will have to get before central bankers take that step, nor how dramatic tensions between America and the rest of the world have to become before faith in central bankers slips still further. The Bank of Japan might be providing an answer to the first of those questions; Mr Bush and his team an answer to the second.

http://www.economist.com


RESTORE THE STANDARD! -Craig R. Smith, CEO, SATC

Despite concerted efforts by bankers and politicians to manipulate the free market, GOLD COINS stand as the purest financial asset on earth. Here's why ...

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IS THE PRICE RIGHT? - From Rediscovering Gold in the 21st Century

Here are six very practical steps that can help you to determine “the price is right” when buying coins. Following these steps could save you money and heartache later.

1. Always buy from a recognized national dealer or broker who has the experience of the ups and downs in the market - a dealer with a minimum of a 10-year track record.

2. Be sure the coins can be bought and delivered at the prices quoted. In other words, don't just buy the quote, buy the coin. I can sell coins 20 percent, 30 percent, even 75 percent less than the other guy if I don't have them. Make sure the dealer can actually deliver the coin at the price quoted.

3. Buy only sight-seen coins with a reasonable inspection period. Make sure you have the option of exchanging the coin if you don't like the way it looks. Also, be sure that the coin you buy has been bought by the dealer on a sight-seen basis and has been inspected for copper spots and other detractions by at least two numismatists.

4. Be sure the dealer offers you a two-way market. A reputable dealer will not only sell you the coin, but will also buy it back. Closely examine the buy-back policy. Make sure the buy-back price does not vary on a basis of quantity. Also inquire on the time factor for repayment. Most reputable companies will settle a trade within 72 hours.

5. Truthful disclosure of risk. Be sure the dealer has presented both the upside and downside risks associated with the coins you are purchasing and discussed the commissions. Short-term versus long-term positioning should be explained and understood.

6. Buy from a dealer that you have complete trust in. Check their references. Most importantly, ask many questions and get satisfying answers. Get facts, not hype.

REGOLD


The Debate Over Exporting Jobs -NYT
By STEVE LOHR
Feb. 23, 2004

There is certainly no shortage of political heat surrounding the subject of jobs migrating abroad. On the campaign trail, Senator John Kerry routinely decries "Benedict Arnold" bosses. And N. Gregory Mankiw, chairman of the White House's Council of Economic Advisers, faced an uproar after he said earlier this month that offshore outsourcing was a good thing for the economy in the long run.

In a presidential election year, when few new jobs are being created despite a growing American economy, the issue of jobs lost to foreign competition - and what can be done about it - will be an important one on the campaign agenda of both Democrats and Republicans.

Job migration, while only one factor in the current employment slump, points to two related economic challenges.

The first is how the United States will respond to a new wave of international competition, and the second is what policies can help displaced workers make the transition to new jobs.

Transplanting work, not just call center operations but also skilled professional labor like computer programming, to lower-cost nations is a manifestation of a change in the terms of trade in global competition. Such jobs can more easily be sent to India or China largely because of technology - inexpensive telecommunications and the Internet. And China, Eastern Europe and India, which all have large numbers of well-educated workers, have entered the global trading system in earnest only in recent years.

"The structure of the world has changed and policy has to change as well," said Craig R. Barrett, chief executive of the Intel Corporation, the world's largest computer chip maker.

FULL STORY


GOLD: DOING THE RIGHT THING! -Bill Bonner, DR
Feb. 24, 2004

The answer is "No."

The question is the one we posed a week ago: has the world seen $400 gold for the last time?

Which leads to this week's question: will it see $300 gold again, too?

What we are questioning is our whole economic worldview... or our Weltanshauung, as we like to say around the office.

We think we know what is going on. But there is more under heaven and earth than is contained even in our philosophy. God does not share his plans with us. Instead, he merely whispers in our ear... when we are half-asleep or half- drunk... 'just do the right thing!'

Then, when we sober up, we ask... 'but what's the right thing?'

We do not know.

But everywhere around us, we see people doing things that couldn't possibly be right. Yesterday's news brought word that home sales and mortgages "may beat records," according to Bloomberg. Americans can't pay their bills already. How could it make sense for them to be buying new houses and taking out new mortgages?

Elsewhere, we discover that people are still buying stocks at prices near their highest levels in history... We say no more about this. We know no better than anyone else what stock prices will do, but buying at these prices can't be the 'right thing' to do.

And in the current Economist, we discover that it is not only the lumps that are erring on the side of recklessness. Apparently the banks, too, have been taking bigger and bigger positions in their trading rooms in a manner that is "not dissimilar" to the geniuses at Long Term Capital Management... before that hedge fund blew up.

Even foreigners can't resist upping the ante; they continue to invest in U.S. assets, the Fed reported last week. "Depending upon where you get the statistic," writes our friend John Mauldin, "foreign central banks own between 39- 45% of our government debt. Throw in private investors and it is even larger. At current trade deficit levels, this would grow to 65% within five years.

"The U.S. has accounted for 96% of the growth in world trade for the last few years. Thus, foreign nations have to be willing to either not take depreciating U.S. dollars and suffer the inevitable slowdown in their economies, or take less for their products in order to be able to keep their work forces producing and economies bumping along... "

We don't know exactly what is going on, but hardly a day goes by that we don't notice more evidence of it. We see it in the world economy... in its money system... and in politics, too. It is the top of a credit cycle, we think. People seem far too confident... far too complacent... far too sure that they will get what they want, rather than what they deserve.

We don't know how this confidence will be undone. But our Weltanshauung... or is it our Erfahrung... tells us that it will be undone sometime, somehow, somewhere. Otherwise, it would be an even stranger world than we think. Things would go up without coming down. We would have summer... but no winter. There would be good, but no evil. You could borrow without having to pay back. You could drink all you wanted without getting a hangover... and whiskey would run from public fountains all over the republic.

We have been in the paradise world of Nicaragua for the last few days. Perhaps everything has changed. But that is not the world we remember.

In the world we remember, gold rises... because the smart money knows there is something wrong. It buys gold as protection... and is happy to get it at a lower price.

http://www.dailyreckoning.com


The Stubborn Trade Deficit - John Mauldin, FrontlineThoughts.com
Feb. 21, 2004

One of the good things about finishing my book is that I have more time to read. Normally, I read 150-200 articles, letters, publications and books a week and then sit down on Friday to write about what I felt was the most interesting or important things I learned that week, trying to draw my thoughts from a variety of authors. This week, I was struck by the number of articles and commentary on the trade deficit and the decline of the dollar, as well as some disturbing statistics.

We are importing more "stuff," but we are paying less for it. This is not how currency devaluation is supposed to work.

But aren't we seeing inflation in commodity prices? The answer is of course yes. But it is evidently not translating itself into higher product prices, at least not yet.

Yet it is hurting producers outside of the US, who are finding they cannot pass along higher prices. Witness Korea, who this week announced they are shifting part of their foreign reserves to buy commodities, and are clearly intent on helping their manufacturing sector by taking up the shock of higher metal prices. China, as well, is beginning to invest part of their reserves in commodities.

As I have been writing for years, there are serious deflationary forces at work in the world at large. There is an imbalance in world trade, as the US has accounted for 96% of the growth in world trade for the last few years. (Morgan Stanley) Thus, foreign nations have to be willing to either not take depreciating US dollars and suffer the inevitable slowdown in their economies, or take less for their products in order to be able to keep their work forces producing and economies bumping along.

History Suggests a Bump in the Road

I have done a lot of thinking and studying about trade deficits. I can find no instance where a country saw its trade deficit rise to 5% and had a smooth landing. There was always a rough patch which followed. I invite readers to show me one case where that observation is wrong. I really would like to know.

We are in a situation without precedent. I continue to believe that we are ok for most of this year, as more stimulus from tax rebates is now ready to flood the economy. But there is an end to that road. Retail sales are slowing.

We have just come through the biggest and most massive stimulus for any economy in world history, and we have not been able to create enough jobs or increase business investment much beyond replacement. (As noted in previous letters, much of the improvement in the unemployment rate is from the removal of millions of people from the unemployed side of the ledger, as they have stopped looking for jobs, and thus, by government reckoning, are not unemployed.)

It seems to me to be setting us up for a recession beginning sometime next year or 2006 at the latest. It is hard to tell, because with the Fed artificially holding short term rates down, the most reliable predictor of recessions, an inverted yield curve, cannot be definition happen. (An inverted yield curve is when short terms rates rise above long term rates, and since WW2, has always been followed within four quarters by a recession.)

FrontlineThoughts


Ash Wednesday renews the spirit -Michael Clancy
The Arizona Republic
Feb. 25, 2004

Ash Wednesday, one of the most popular observances on the Christian calendar that is not a sabbath or major holiday, is celebrated today.

Different clergy people and different faith traditions have variations on the meaning of the event, but they all agree that the 40 days, excluding Sundays, that lead up to Easter on April 11 are among the most significant for the faithful.

For the Christian and Orthodox faiths, Lent is a time of preparation for the historical memorials of Christ's suffering, death and ultimate rebirth, celebrated on Easter.

Ashes, a symbol of penance and cleansing, are administered to the forehead as a reminder of mortality.

FULL STORY

Related stories:
Fans rise early for Ash Wednesday film debut -AP
Do You Recognize This Jesus? By KENNETH L. WOODWARD, NYT
Dr. Ted Baehr's Movieguide Review of PASSION
Ash Wednesday marks start of Lent, time of repentance
Will Hollywood get religion? [based on PASSION success]-CNN
Did Jesus Get Lost in Translation? by Gary North
THE PASSION OF THE CHRIST Short Review by Kevin McCullough

NEW YORK (nycradio.com) 2-25-04--Rotten Tomatoes has a round-up of all the major reviews being released today. I am particularly saddened that in the final 24 hours before it opened there were still folks (like the man on Scarborough Country last night on MSNBC whose names escapes me) who were criticizing the film without having seen it. I finally was able to screen the film Monday night, and if you have noticed - I have not written about it much until now simply because I had not experienced the film personally...

I have heard the "anti-semitism" charge - FALSE. The Romans who take the orders from Pilate are BY FAR the more barbaric...and on this note it is important to refer back to the interveiw Mel Gibson did with Diane Sawyer. He tells Sawyer that his only appearance in the film is him as he drives the nail into Christ's hand - thus symbolizing the fact that HE killed Christ. In other words for those of you who are still too dense to be snapped out of the mainstream media's spell - WE KILLED CHRIST. All of us. Everyone of us... For all have sinned, for the wages of sin is death, for God so loved the world that He gave His only Son...that who so ever believes in Him (Christ), should not perish but have eternal life...

The problem with the film is that it is so relentlessly honest that those who see it are forced to face the facts that it leaves the viewer with. This explains why the average movie critic across the nation today are so uncomfortable with it. It is disturbing to them to see how much pain and sacrifice Christ suffered on THEIR behalf. To think that any person would go through such suffering - even for someone that we know personally - is surreal. To see someone go through such suffering for people who are hostile to the thought of even believing in Him is a stumbling block of monumental proportion. As it should be... Christ's death was something that should be hard for us to accept - thus the very difficult task of giving up our selfishness to live our lives in gratitude and following Him for the rest of our days...


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ABOUT THE EDITOR

David M. Bradshaw is Editor of Real Money Perspectives, publisher of Rediscovering Gold in the 21st Century: The Complete Guide to the Next Gold Rush (7/01) and has been an economic commentator since 1987, when he produced the World Economic Perspectives radio show. In 1997, he produced a one-hour TV documentary, "Preparing Wisely for the Next Millennium," which was distributed free of charge at Blockbuster Video nationally. In 1999, he produced a one-hour radio special, "The Big Picture: The Shape of Things to Come" discussing geopolitical, economic and spiritual trends in the 21st Century. MORE...


DISCLAIMER: All of the information in this story is believed to be true, however errors are possible.
Past performance is no guarantee of future performance. All investments have risk. -SATC

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